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Planning for 2010, III:
Global Allocations for the Optimist: 50/50 or 33/33/33?
Avi Nachmany, Director of Research, Strategic Insight, an Asset International Company
I may be traveling on a fast train between Madrid and Seville on a short family vacation, but I am not just thinking about Spain. I am also thinking about my Strategic Insight colleagues who are traveling: Sonia, our senior researcher, visiting India; Jag and Daniel, who head Strategic Insight’s global advisory efforts, on their way to Tokyo and Hong Kong; and others. This globe-trotting, which seemed somewhat exotic 20 years ago, leads me back to thinking about how to allocate the investments in a portfolio. Should one invest in developed countries such as the Euro Zone and the US, or in the emerging markets, or in “frontier” markets? How connected and correlated is today’s investment world? Will the coming decade experience more global economic integration, or greater isolationism?
These are key questions for SI analysts communicating every day with our clients – investment management firms worldwide that together oversee more than $20 trillion of assets. Where should fund managers expand their search for investment management talent (or distribution partnerships)? How should they construct asset allocation for their one-stop solutions? What guidance should they offer to financial advisors searching for ways to help their clients in stock mutual funds build wealth for the long run within retirement accounts?
Since 2003 and for much of the subsequent years, international equity funds increased their share of the US mutual fund industry, almost doubling their share of all stock fund assets at the beginning of the decade to near 30% lately. In Strategic Insight’s mutual fund industry Forecast for 2010, we observed the rapid increase in deposits into international equity funds last year (led by diversified emerging markets or single-country emerging markets) and projected further above-average gains for 2010. [Find out more about our forecast report here]
Looking ahead to 2010, and beyond: are inflows to international equity funds likely to resume the explosive growth they enjoyed from 2003 through 2007? During those five years, roughly $700 billion were net invested in international equity funds, partly triggered by the outperformance of international stocks versus the S&P 500, as seen below.
A similar very large amount was allocated to non-US securities held by US-centered equity funds (substituting for US securities). Together with parallel actions among institutional investors, I guesstimate that more than $2 trillion were transferred to international securities and away from US securities during 2003-2007. At the same time, there were similar patterns of investment away from US dollars within a number of developed markets overseas. These huge rebalances triggered massive liquidity-induced price appreciation in certain capital markets (and US dollar depreciation), especially within emerging economies. Some of these trends paused during the 2008-2009 worldwide crisis but may now be resuming. Since April 2009, accelerating international stock fund net flow trends (led by Emerging Markets) are exemplified above.
In addition to these rising net inflows, we see a near-consensus about the long-term fate of the US dollar, and further global diversification away by US stock fund investors who traditionally had concentrated nearly all their investments in US stocks. There are also signs of a growing emergence of global asset allocation funds as a core equity strategy among investors and financial advisors. All these factors suggest that 2010 and beyond will continue to witness a secular trend towards higher allocation of financial assets to international stock funds.
Many readers of SI research would recognize our persistent advocacy for US stock investors to have a starting point of 50% of assets in stocks in US securities (or funds) and 50% of stock assets in International equity funds. For the coming decade, maybe a new paradigm is in order: 33% Emerging and Frontier Markets; 33% International Developed markets; and 33% US. This allocation may be more in line with where the world’s wealth will be held at the end of this coming decade. Why not get there now?
Back to a vacation mindset. One of the places I find most inspiring when thinking about long-term wealth creation are museums. In a museum you can observe timeless masters of innovation and beauty – as they are marveled at by young and optimistic visitors from China, India, Malaysia, Norway, Australia, Brazil, Russia, Abu Dubai, the US, and so many other exciting places. Reflecting on such excited museum visitors, and on their investment lives to be, I note that in the past decade the average US Large Cap Core stock fund earned virtually nothing; meanwhile, the average International stock fund earned a cumulative 40% (partly driven by currency advantages). And Diversified Emerging Market funds doubled in value, while Latin America stock funds quadrupled!
Stock returns in the next 10 years will likely be very different than the last 10. But a 33%:33%:33% asset allocation for one’s global stock portfolio, as a starting point, feels like a bet founded on an optimistic view of our world’s future.
Missed Part 1?
Planning for 2010, I:
Tectonic Plate Shifts and the Insatiable Demand for Bond Funds
Missed Part 2?
Planning for 2010, II:
"There's No Way You Can Bet Against America & Win" (Warren Buffet)
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