A friend recently asked me: “Why invest in foreign markets, they haven’t done anything over the last 5 years?” My first response was to point out that the past 5 years in not predictive of the subsequent 5 years for any investment. In other words, the fact that they haven’t done well does not mean that they wont do well. Making asset allocation decisions based on how an investment has done in the recent past is the wrong approach.
In “Triumph of the Optimists” (Dimson, Marsh, Staunton, 2002) researchers have taken a much longer view of foreign market returns. They studied 15 foreign markets plus the U.S. from 1900 through 2000. Their research showed that although the U.S. market did well, three others did better: South Africa, Australia, and Sweden. In addition, the markets of all of the countries studied produced significant returns above the rate of inflation. The authors also compared the performance of value and growth stocks in the 15 markets (based on book-to-market). In 14 out of 15 markets value stocks outperformed growth by a significant margin (Italy was the exception). This is consistent with what researchers have found in the U.S.
David Swensen, the well regarded Chief Investment Officer of Yale University states in his book (Unconventional Success, 2005): “The lack of correlation between foreign markets and the U.S. market provides a valuable diversification opportunity for investors”. Swensen goes on to say: “Sensible investors invest in foreign equity markets through thick and thin, regardless of recent past performance”. Although Swensen cautions that investments in emerging markets stocks should be modest. I suggest that all of my clients have investments in foreign markets, with the starting point being a 25% allocation.
The Haas Capital Management Foreign Value Strategy seeks to outperform broad foreign equity indexes over the long term. The approach of this strategy is to invest equal weights in 15 countries that I believe offer the best value. P/E ratios and current dividend yield are important factors in the selection process. Learn more about this strategy here.