Diversified investors may be frustrated by the underperformance of their international equity returns relative to their domestic equity returns over recent years. This may have caused some diversified investors to minimize their rebalancing efforts, resulting in a significant U.S. equity overweight and international equity underweight.
Walking away from superior performance can be difficult. Rebalancing requires discipline, a longer-term perspective, and an understanding of the potential rewards of rebalancing and the potential risks of not rebalancing.
As of June 30th, 2018. Past performance is no guarantee of future results.
Source: FactSet, MSCI, Standard and Poors.
Over time, some assets in a portfolio may outperform others, creating an allocation that’s not balanced the way an investor originally intended. Rebalancing is the periodic discipline of buying and/or selling assets to maintain the desired level of allocation. The primary objectives are to potentially benefit from anticipated cyclical performance and control risk.
Source: MSCI, Standard and Poor’s, FactSet as of June 30th, 2018.
The chart displays the difference in rolling 5-year annualized performance of the S&P 500 Index and MSCI World ex USA Index.
Past performance is no guarantee of future results.
Source: Thomson Reuters, Robert Shiller, FactSet.
Cyclically adjusted price-to-earnings ratio (CAPE) is a valuation measure that is defined as price divided by the average of ten years or earnings, adjusted for inflation.
1 MSCI EM Shiller and CAPE data as of 4/30/18. Data for S&P 500 Index and MSCI EAFE from 12/31/04-4/30/18.
2 P/B data is as of 6/30/18.
3 Data for S&P 500 Index from 02/28/01-6/30/18, MSCI EAFE from 01/31/98-6/30/18, MSCI EM from 06/30/00-6/30/18.
As of June 30th, 2018. Past performance is no guarantee of future results.
Source: FactSet, MSCI, Standard and Poor’s.
Source: FactSet, MSCI, Standard and Poor’s. Past performance is no guarantee of future results.
* Equity Index yields for U.S. and EMU are S&P 500 and MSCI EAFE Indexes, respectively.
1 Foreign equities may be more desirable, relative to U.S. equities, given the foreign central banks’ encouragement for investors to invest in risk assets relative to extremely low interest bearing securities.
Source: Federal Reserve, Bank of Japan, ECB, Swiss National Bank, as of June 30th, 2018.
As of June 30, 2018.
Diversified investors understand the potential benefits of allocating equity assets outside the U.S. to seek to enhance the risk/return profile of their investment portfolios. One thing we know for certain is this: The cyclicality, valuations, and economic fundamentals of the equity markets will continue to change.
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. These risks are magnified in emerging markets.
Price/book (or P/B) ratio is calculated by dividing the market price of a company’s outstanding stock by its book value (total assets of a company less liabilities) and then adjusting for the number of shares outstanding. Stocks with negative book values are usually excluded from this calculation. Price/earnings (or P/E) ratio is a comparison of the company’s closing stock price and its trailing 12-month earnings per share.
Yield to Maturity (YTM) is the total return anticipated on a bond if the bond is held until the end of its lifetime. Yield to maturity is considered a long-term bond yield, but is expressed as an annual rate.
The MSCI All Country World ex-USA Index 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 All Country World ex-USA Index consists of 22 developed and 24 emerging market country indices.
The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the U.S. market. With 617 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the U.S. MSCI All Country World Index.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of 24 emerging market country indices.
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. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.
Please go to msci.com for most current list of countries represented by the MSCI indices.
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 S&P 500 Index is proprietary data of Standard & Poor’s, a division of McGraw-Hill Companies, Inc. All rights reserved.
Foreign Manager’s Purchasing Index definitions:
U.S.: A monthly index of U.S. manufacturing compiled by the Institute of Supply Management (ISM). Previously known as the National Association of Purchasing Management (NAPM) Index, the ISM Manufacturing Index is derived from the institute’s “Report on Business” survey of purchasing and supply executives across the nation.
Euro Zone: The Eurozone Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
United Kingdom: The United Kingdom purchasing managers’ index is a monthly survey compiled by financial information firm Markit and the Chartered Institute of Purchasing and Supply (CIPS) for the UK manufacturing, construction and services sectors.
Japan: The Nikkei Japan Manufacturing Purchasing Managers’ Index measures the performance of the manufacturing sector and is derived from a survey of 400 industrial companies.
China: The Caixin Manufacturing PMI Purchasing Managers’ Index measures the performance of the manufacturing sector and is derived from a survey of private 430 industrial companies.
The indices are unmanaged, are not available for investment and do not incur expenses.
AMG Distributors, Inc., a member of FINRA / SIPC.
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