We believe that the equity allocation, large or small, of portfolio should reflect the global pattern of business development, following global growth and profits fundamentals.

Investing with a home country bias may be emotionally comforting, but it is becoming increasingly suboptimal.

We have written repeatedly that the tendency to massively overweight home country positions with a toe or a foot in other parts of the world fails to participate fully in world growth and opportunity.

A total world fund such as Vanguard’s Total World Stock ETF (symbol VT) based on the FTSE All-World Index is a good option to consider for those seeking simplicity in their portfolios, or as a core position to be supplemented by more specialized funds.
Access fund webpage.

The Index includes approximately 2,900 stocks of companies located in 47 countries, including both developed and emerging markets. The fund holds 1,737 stocks and carries a 25 basis point expense ratio.

Another total world fund is Barclay’s MSCI ACWI Index ETF (symbol ACWI) based on the MSCI All World Country index. It is also a core fund.
Access fund webpage.

The index represents 48 developed and emerging market countries. The fund holds stocks of 701 companies and carries a 35 basis point expense ratio.

Note that both VT and ACWI are free-float market-cap weighted and currently have 41.8% and 41.3% US stock weightings respectively.  That tells you that 58+% of the world’s nominal stock investment opportunity is someplace other than the US.  Compare that to the basic mindset and traditional belief that a US investor should have 75% to 85% of equity asset in the home market.  Why? Intellectual and cultural inertia is our guess.

One possible argument against venturing heavily abroad is that large US companies have so much international involvement that in combination with moderate direct international exposure, US investors actually get the global exposure they need.  Well maybe that’s true.

Another argument is that for large-cap, multinational companies, global investing through country funds will become decreasingly effective at producing superior returns, while global sector investing will become increasingly more effective.  So, if a portfolio has US domiciled global leaders in the right sectors and industries, that’s what’s really important.  That may true too.

The important point is that those arguments against global weighting of the equity portion of a portfolio are actually arguments for global weighting — they just get there by different avenues.

For smaller companies that are less multi-national in character, global investing through country funds may continue to be most effective.

Performance Comparisons:

The chart below compares VTI (total US stocks) and VEU (total non-US stocks to VT and ACWI.

click image to enlarge

Recently, the US market has been outperforming the non-US markets, which puts the total world funds behind the US.  That may continue for a while, but long-term the world is expected to grow more than the US, and participating in that growth will be a key determinant of portfolio gains.

Our bottom line is that whether you seek a global posture through world funds, region or country funds, or through global leaders in target sectors and industries, it is important that you assure yourself that your portfolio is positioned to participate strongly in global growth.

Richard Shaw
QVM Group

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