Global and International Equity

The Importance of Broad Regional Diversification

Global equity markets typically exhibit wide dispersion among geographic regions and sectors year in, year out. As market leadership can change quickly, broad global diversification may improve investor outcomes, as it is nearly impossible to predict the next year’s leaders.

A Broad Regional Allocation May Allow Investors to Benefit from the Next Market Leaders.

Source: FactSet. As of December 31, 2021. Frontier Market data is not available prior to 2003. Past performance is no guarantee of future results.
U.S. Large Cap (US LC), International Developed Markets (Intl Dev), Global Markets (Global), Emerging Markets (EM), U.S. Small Cap (US SC), International Small Cap (Intl SC), and Frontier Markets (Frontier) are respectively represented by the following Indices: S&P 500, MSCI EAFE, MSCI ACWI, MSCI EM, Russell 2000, MSCI ACWI ex USA SC, and MSCI FM. Click here for Index definitions.

The Importance of Broad Regional Diversification

39% of the world’s investment universe—representing $4.8 trillion—is outside the U.S.
Despite this opportunity, many U.S. investors demonstrate a strong bias to their home market; the reason may be that investors are risk averse or are drawn to the familiarity and perceived quality of U.S. companies.
Investors should consider looking beyond the U.S. stock market into other developed and emerging markets, many of which are undergoing striking population and economic shifts that can potentially contribute to long-term total return and portfolio diversification.

Global Investable Universe
Total World Equity Market Cap: $80.0 Trillion¹

Allocations in Equity Mutual Funds and ETFs

World of Opportunity - Global Investable Universe

Source: FactSet, MSCI. Market segments are represented by components of the MSCI ACWI All Cap.
1 Per MSCI ACWI All Cap. As of December 31, 2021.

Source: Morningstar. As of December 31, 2021. Allocations based on total assets in Morningstar categories of U.S. domiciled funds.
Not representative of full Morningstar Universe. The world stock category is Internatonal Large Cap.

Volatile Assets Can Lower Portfolio Risk

While many foreign stock markets can individually exhibit higher volatility than the U.S., when combined into a globally diversified portfolio, the overall portfolio volatility can be reduced because global markets are not perfectly correlated with each other.
The following chart illustrates a key principle of global diversification: adding assets with lower correlation—even ones that may be volatile in their own right—may help to reduce overall portfolio volatility.

A Combined Global Portfolio Has Lower Volatility than Any of the Individual Countries
Annualized Standard Deviation: January 1, 2001–December 31, 2021

World of Opportunity - Combined Global Portfolio

Source: MSCI, FactSet. The Global Portfolio is represented by the MSCI ACWI since 1988 and the MSCI World Index prior to 1988. U.S. is represented by the S&P 500® Index.

U.S. Equities Have Reached Extreme Levels Relative to International Equities

For over 50 years, U.S. and international equities traded within a range, with each experiencing long cycles of out- and under-performance.
The recent cycle of U.S. outperformance, beginning in 2008, has driven U.S. equities to record highs relative to international equities.
Should this trend reverse and the U.S. revert to more normal levels, the extreme divergence in the relationship between the two markets could present a meaningful opportunity for global investors.

U.S. vs. International Total Return Levels

World of Opporunity - US vs Int'l Total Return

Source: MSCI, FactSet. As of June 30, 2021. The U.S. Index is represented by the MSCI USA Index and the International Index is a composite index represented by the MSCI ACWI ex USA Index from its December 31, 1987, inception and the MSCI EAFE Index prior to that date.

International Equities Look Poised To Outperform

If the U.S. is near an inflection point, the next five to ten years could be a favorable cycle for international equities.
One could argue that the recent outperformance of the U.S. may be justified due to the strength of the U.S. economy; however, international equities trade at steep discounts to the U.S., even when factoring in that consideration.

Returns 10 Years Following Previous U.S. Index Peaks Relative to International
Annualized Return

Source: MSCI, FactSet. The U.S. Index is represented by the MSCI USA Index and the International Index is a composite index represented by the MSCI ACWI ex USA Index from its December 31, 1987, inception and the MSCI EAFE Index prior to that date. Past performance is no guarantee of future results.

Relative Valuation Near Historic Discount to the U.S.

World of Opportunity - Relative Valuation

Source: FactSet, MSCI, Russell, S&P. As of December 31, 2021. P/E based on earnings for the last 12 months.

Many Highly Profitable Businesses Exist Outside of the U.S.

A Review of the 20 Most Profitable Companies in Each Sector Globally Shows a Majority are Located Outside the U.S.

Top 20 Companies by 5-Year Median Cash Flow Return on Investment (CFROI)

Source: FactSet, MSCI, Harding Loevner, HOLT database. Companies with market cap > $1 billion as of January 25, 2019. Profitability is based on 5-year median CFROI. CFROI is the average economic return on all of a company’s investment projects in a given year.

Does a Company’s Domicile Matter?

Investors commonly allocate their portfolios into geographic buckets—U.S., International, Emerging Markets, and so on—based on corporate domiciles; however, many global companies, domiciled both inside and outside the U.S., have diverse multinational revenue streams.
For this reason, a diversified global equity allocation can potentially provide better opportunity than one that is purely U.S. focused.

Revenue Sources for Largest U.S. and International Companies

Source: FactSet, S&P, MSCI. As of December 31, 2021. Values are estimated based on FactSet’s proprietary algorithm. U.S. companies are represented by the S&P 500® Index. Non-U.S. companies are represented by the MSCI ACWI ex USA Index.

Quality Has Outperformed Over the Long Term

Growth and value often have performed in cycles, and each has had long stretches of outperformance.
An investor who favored value would have outperformed during the 2000s, but would have lagged significantly during the current cycle.
However, an investor that focused on quality and growth—namely in companies demonstrating high ROEs, stable earnings, and low leverage—would have outperformed both stand-alone value and growth investments, with lower risk.
As illustrated below, an investor who has focused on quality has outperformed with lower risk over the long term.

Risk and Return
January 1, 2001–June 30, 2021

Source: FactSet, S&P, MSCI.As of December 31, 2021. Value sare estimated based on FactSet’s proprietary algorithm.U.S.companies are represented by the S&P 500® Index.Non-U.S.companies are represented by the MSCI ACWI ex USA Index.

A Focus on Quality May Help Limit Losses in a Downturn

Quality has also performed better than core international in down markets, and has outperformed in each of the prior five bear markets (declines of 20% or more) for international equities.

Peak to Trough Performance of Quality vs. Core Index

Source: FactSet, MSCI. International and International Quality are respectively represented by the MSCI ACWI ex USA and MSCI ACWI ex USA Quality. Past performance is no guarantee of future results.

Currency Movements Are Unpredictable—and Help and Hurt About the Same Over the Long Term

Quarterly Returns of MSCI EAFE Index in USD vs. Local Currency

Source: FactSet, MSCI. As of December 31, 2021.

U.S. Dollar Trends Impact Returns for International Stock Investments

The U.S. Dollar (USD) has appreciated over the last several years, crimping the returns for U.S. investors in international markets.
A reversal in the USD could potentially provide a tailwind for international investments.
However, at the corporate level, the strong USD dilutes the value of overseas revenues for U.S. companies and makes U.S. products more expensive for foreign buyers, which exerts downward pressure on U.S. corporate profits from overseas.

U.S. Dollar Movements
Index Level

Source: FactSet, MSCI, S&P. As of December 31, 2021. Past performance is no guarantee of future results.

All investments are subject to risk including possible loss of principal.

Diversification does not guarantee a profit or protect against a loss in declining markets.

Investments in international securities are subject to certain risks of overseas investing including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations.

Investments in small capitalization companies are subject to risks such as erratic earnings patterns, competitive conditions, limited earnings history, and a reliance on one or a limited number of products.

Investments in frontier emerging markets and emerging markets are subject to risks such as erratic earnings patterns, economic and political instability, changing exchange controls, limitations on repatriation of foreign capital, and changes in local governmental attitudes toward private investment, possibly leading to nationalization or confiscation of investor assets.

Market prices of investments held by the Fund may fall rapidly or unpredictably due to a variety of economic or political factors, market conditions, disasters or public health issues, or in response to events that affect particular industries or companies.

Alpha, often considered the active return on an investment, measures the performance of an investment against a market index used as a benchmark, since the benchmark is often considered to represent the market’s movement as a whole. The excess return of a fund relative to the return of a benchmark index is the fund’s alpha.

The Sharpe ratio is calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe ratio, the better the portfolio’s historical risk-adjusted performance.

Standard deviation is used as a measure of an investment’s volatility. It calculates the variability of returns by comparing a mutual fund’s return in each period with the average return across all periods. The standard deviation is not available for periods of less than three years.

The Russell 2000® Index measures the performance of approximately 2,000 small-cap companies in the Russell 3000® Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

The S&P 500® Index is a capitalization-weighted index of 500 stocks. The S&P 500® Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market.

The MSCI All Country World All Cap Index (MSCI ACWI All Cap) captures large, mid, small and micro cap representation across certain Developed Markets (DM) countries and large, mid, and small cap representation across certain Emerging Markets (EM) countries. The index is comprehensive, covering a significant percentage of the global equity investment opportunity set.

The MSCI All Country World Index ex USA (MSCI ACWI ex USA) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

The MSCI ACWI ex USA Small Cap Index is a free float-adjusted market capitalization weighted index that is designed to measure the small capitalization equity market performance of certain developed (excluding the U.S.) and emerging markets.

The MSCI ACWI ex USA Quality Index captures the performance of quality growth stocks across certain developed and emerging market countries by identifying stocks with high quality scores.

The MSCI ACWI ex USA Growth Index captures large and mid cap securities exhibiting overall growth style characteristics across certain developed and emerging market countries.

The MSCI ACWI ex USA Value Index captures large and mid cap securities exhibiting overall value style characteristics across certain developed and emerging market countries.

The MSCI Emerging Markets Index (MSCI EM) is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

The MSCI Frontier Markets Index (MSCI FM) captures large and mid cap representation across certain frontier market countries.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S.& Canada.

All MSCI data is provided “as is.” The products described herein are not sponsored or endorsed and have not been reviewed or passed on by MSCI. In no event will MSCI, its affiliates, or any MSCI data provider have any liability of any kind in connection with the MSCI data or the products described herein. Copying or redistributing the MSCI data is strictly prohibited.

Please visit msci.com for the most current list of countries represented by the MSCI indices.

Indices are unmanaged, are not available for investment, and do not incur expenses.

All data referenced are from sources deemed to be reliable but cannot be guaranteed as to accuracy or completeness.

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