One question I often ask clients is, what’s the difference between Nestle and Hershey’s?
They both produce iconic candies, such as Nestle Crunch and Hershey’s Kisses, respectively, source their ingredients from the same geographical locations and widely sell to the same consumer. The big difference is where they are headquartered, Nestle, in Switzerland, and Hershey’s, in Pennsylvania. Some U.S. investors may feel more comfortable investing in Hershey’s because Hershey’s is a U.S. company, despite the fact that the companies use similar raw materials and sell similar end products. But, by instinctively picking one asset class (domestic equities) over the other (international equities), an investor may be limiting their potential opportunities.
Just under 50% of the world’s publicly traded companies are located outside the United States. And at the time of this writing, the two biggest companies in the world are headquartered in China. I mention this because many investors exhibit a home bias when it comes to constructing their portfolio. People are often more comfortable investing in companies which they’ve read about and heard about in the news for years, but the reality is that such a narrow perspective can cause an investor to become over-weight in domestic positions. Of course, every investor will have their own goals and time horizons, and must act in accordance with their capacity for risk, and really, in whatever manner they are comfortable. I would simply point out that ignoring international equities is not a perspective that will provide the necessary diversification to balance your portfolio, nor will it position you to take advantage of valuation opportunities which may exist.
Historically, domestic and international equity performance leadership ebbs and flows. From the late 1990s through the early 2000s, U.S. equities outperformed international equities, from the early to mid-2000s, international outperformed U.S., since then, U.S. has outperformed international. And this cycling is expected to continue. I am not suggesting that anyone try to time the market, but rather, that they should take a global perspective instead of exclusively focusing on domestic equities.
For a more in depth look at the role international equities can play in your portfolio, see my OnePaper.
