the benefits of international investing

This shift is influencing long-term investors who may benefit from increased returns and from reduced portfolio risk by investing in international markets.

The metrics below demonstrate the markets’ evolution, and they all project growth favoring non-U.S. markets:

• 90% of publicly listed companies are domiciled outside the United States1

• 85% of the proceeds of companies offering stock for the first time in 2016 were for companies located outside of the United States2

• Companies representing nearly 58% of world market capitalization are located outside the United States3

• 76% of global economic production is generated outside the United States4

However, U.S.-based investors still tend to favor investing primarily in U.S. stocks, despite the potential for higher growth outside the United States. This “home country” approach is driven by behavioral bias—such as familiarity, patriotism and misconceptions about the risk of international investments—and may result in lower risk-adjusted returns. Investing in international stocks can reduce risks and increase an investment portfolio’s potential for higher returns due to the:

• Expanded universe of investment opportunities• Exposure to markets with substantial growth potential• Geographic and currency diversification

The Benefits of International Investing

There is an ongoing global shift in financial markets, with a greater share of global investment opportunity and economic growth coming from outside the United States.

1 World Bank Data, as of December 31, 2016: https://data.worldbank.org/indicator/CM.MKT.LDOM.NO

2 Thomson Reuters: Global Equity Capital Markets Review, Managing Underwriters, Full Year 2016; FactSet, December 29, 2016

3 World Bank Data, as of December 31, 2016: https://data.worldbank.org/indicator/CM.MKT.LCAP.CD

4 World Bank, World Development Indicators database, April 17, 2017, data as of December 31, 2016

Mark Warren, CFA, CIMA Manager, Public Equities

Mark joined Wespath in August 2015 and is responsible for overseeing the public equity investment program.

Previously, Mark held senior level positions with The Boeing Company where he was responsible for public and private equity investments within the pension group. Prior to joining Boeing, Mark was vice president with HighMark Capital Management where he evaluated investment allocations with outside money managers. Prior to that, Mark worked at the Abu Dhabi Investment Authority (ADIA) as an assistant fund manager and at Deloitte & Touche Investment Advisors as a senior consultant.

Mark received a bachelor’s degree from Purdue University. He is also a CFA Charterholder and a Certified Investment Management Analyst (CIMA).

The white papers and thought leadership articles published prior to 2019 were created under the Wespath Investment Management brand name. Upon the January 2019 launch of Wespath Institutional Investments, the Wespath Investment Management brand name was discontinued.

https://data.worldbank.org/indicator/CM.MKT.LDOM.NO


https://data.worldbank.org/indicator/CM.MKT.LCAP.CD

https://data.worldbank.org/indicator/CM.MKT.LCAP.CD

This paper analyzes each of the benefits of investing in international stocks in more detail.

Expanded Universe of Investment Opportunities

The number of U.S. companies available for investment has been declining steadily. The number of publicly-listed companies in the United States has declined 46%—to 4,331 in 2016 from 8,090 in 19965. This decrease is mainly due to merger and acquisition activity; however, non-U.S. listings rose nearly 36% during the same period to 38,861 from 28,5476.

Moreover, limiting an investor’s choices to only U.S.-listed companies can significantly diminish a portfolio’s overall return potential. For the 10-year period ending August 31, 2017, 47 out of the 50 best performing public stocks in the world came from outside the United States (FactSet).

47 out of the 50 best performing public stocks in the world came from outside the United States for the 10-year period ending August 31, 2017 (FactSet)

Over the past 10 calendar years, the best performing developed stock markets have all been outside the United States.

2007 2008 2009 2010 2011

Finland 50%

Israel -29%

Norway 89%

Sweden 35%

Ireland 14%

U.S. 5%

U.S. -37%

U.S. 26%

U.S. 15%

U.S. 2%

2012 2013 2014 2015 2016

Belgium 41%

Finland 48%

Israel 24%

Denmark 17%

Canada 25%

U.S. 16%

U.S. 32%

U.S. 14%

U.S. 1%

U.S. 12%

Source: FactSet; calendar returns in USD

2

The Benefits of International Investing

Norway Israel Ireland

Finland Denmark Canada

Belgium United States United States

Sweden




SwedenNorway Israel Ireland









Sweden




Sweden




Sweden




Sweden







Sweden

Past 10 years best performing developed stock markets have all been outside the United States.

5 World Bank Data, as of December 31, 2016: https://data.worldbank.org/indicator/CM.MKT.LDOM.NO

6 Ibid.



Exposure to Markets with Substantial Growth Potential

During the next 20 years, non-U.S. companies, many of which are in emerging economies, are expected to drive global growth (see chart 1 below). Reasons for investors to consider positioning themselves to capture this growth are:

1

Non-U.S. markets currently contribute to a majority of economic output and are projected to produce the majority of the growth in the future.7 One of Wespath’s Investment Beliefs, a set of 10 guiding principles that help define Wespath’s investment philosophy, states that the world will experience modest sustainable growth led by the emerging economies of Asia, Latin America, Africa and Eastern Europe. From the below chart, examples include China, Brazil, South Africa and the Czech Republic. As developing countries increase their share of global output, the United States’ share of the global economy has been shrinking. In 2001, the United States contributed 33% to global economic output8, as measured by Gross Domestic Product (GDP). Today the United States accounts for only 24%9.

24%—the United States’ share of global economic output as measured by GDP today. In 2001, the United States accounted for 33% of the GDP.

2

Studies show that over longer periods, GDP growth is an indicator of potential equity market returns. One study by Legal & General Investment Management (LGIM) illustrated that the multiplier between a country’s nominal GDP (i.e., economic growth that includes the effects of inflation) and earnings per share (EPS) has tended to gravitate toward one over time10—an indication that as GDP grows, EPS is expected to equally grow. The study also showed that higher EPS is reflected in higher share prices.

3

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Germ

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Port

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Spai

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Denm

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Finl

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Aust

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Fran

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Nor

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Aust

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U.K.

Swed

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Cana

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Switz

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Hung

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Pola

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Sing

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Russ

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Czec

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Chile

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Mex

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Turk

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Peru

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aChart 1—Real Gross Domestic Product (GDP) Growth Forecast, 2015-2034

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0%

Global Growth Rate: 2.1%

Source: Fidelity Investments (AART), as of June 10, 2015

7 “10 Reasons to Consider International Equity Today,” Fidelity Global Advisors, June 2015.

8 Ibid.9 World Bank, World Development Indicators database, April 17, 2017, data as of

December 31, 2016. 10 “Fundamentals: Emerging market equities: Reasons to be cheerful,” Lars Kreckel,

Global Equity Strategies, Legal & General Investment Management; September, 2012.

http://www.wespath.com/investment_philosophy/beliefs/

http://www.wespath.com/investment_philosophy/beliefs/

Geographic and Currency Diversification

It is a long understood tenet of portfolio management that incorporating investments that move in different directions during different periods (expressed by an investment’s correlation with other investments) can improve a portfolio’s return potential while maintaining or partially mitigating risk.

The impact of currency, which is specific to non-domestic investments, has a further diversifying effect. These concepts are described further:

1

Diversification benefits a portfolio by improving the overall risk/return profile. In recent years, correlations between international and U.S. stocks have trended down to levels that existed before the 2008 financial crisis, when the effects of the Great Recession adversely affected all markets.

2

Performance of the U.S. market versus non-U.S. markets ebbs and flows. While the U.S. stock market has outperformed many international markets for much of the post-financial-crisis period, the performance of the U.S. stock market compared to international markets rotates, with periods of leadership normally lasting several years. As illustrated in the graph (see chart 3), international markets appear to be due to outperform the U.S. market once again.

4

The Benefits of International Investing (continued)

11 “The Impact of Foreign-Currency Movements on Equity Portfolios,” Morningstar, June 2015.

Chart 2—Rolling Multi-Horizon Chart: Correlation01/2006 to 08/2017

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

0.95

0.90

0.85

0.80

0.75

0.70

0.65

0.79 3

U.S. investors holding non-U.S. stocks can benefit from foreign currency exposure and intentionally not hedging currency. This results from:

• Additional diversification—as currencies often move in different directions over shorter time horizons.

• Reduced costs—costs associated with hedging can include carrying costs, bid/ask spreads and margin (i.e., a small cash deposit required to place a hedge), which potentially can significantly dampen returns over time. Studies have shown that the benefit of currency hedging to returns is negligible over the long-term11 as currencies are subject to offsetting cycles. Not only is hedging costly, but it can ultimately decrease a portfolio’s overall diversification.

-DRAFT1.2-

4

1. Diversification benefits a portfolio by improving the overall risk/return profile. In recent years, correlations between international and U.S. stocks have trended down to levels that existed before the 2008 financial crisis, when the effects of the Great Recession adversely affected all markets. This is partly attributable to a divergence in how countries and regions address issues regarding wage inequality, immigration policy and renewed nationalism, all of which affect economic growth.

2. Performance of the U.S. market versus non-U.S. markets ebbs and flows. While the U.S. stock

market has outperformed many international markets for much of the post-financial-crisis period, the performance of the U.S. stock market compared to international markets rotates, with periods of leadership normally lasting several years. As illustrated in the graph, international markets are due to outperform the U.S. market once again.

Source: Russell Investment Group, FactSet as of August 31, 2017 S&P 500 vs. MSCI EAFE.

3. U.S. investors holding non-U.S. stocks can benefit from foreign currency exposure and intentionally not hedging currency. This results from:

Additional diversification—as currencies often move in different directions over shorter time horizons.

Reduced costs—costs associated with hedging can include carrying costs, bid/ask spreads and margin (i.e., a small cash deposit required to place a hedge), which potentially can significantly dampen returns over time. Studies have shown that the benefit of currency hedging to returns is negligible over the long-term6 as currencies are subject to offsetting cycles. Not only is hedging costly, but it can ultimately decrease a portfolio’s overall diversification.

-30%

-20%

-10%

0%

10%

20%

30%

40%

International outperforms U.S

U.S. outperforms International

Chart 3—Performance of the U.S. Market Vs. Non-U.S. Markets

Source: Russell Investment Group, FactSet as of August 31, 2017 S&P 500 vs. MSCI EAFE.

Source: FactSet— MSCI AC World ex USA IMI—Net Return

In Conclusion

Wespath and its external investment managers are constantly evaluating global markets and investing in areas that provide the best risk/return potential. We believe investing outside the United States provides a number of key benefits that improves a portfolio’s potential for higher returns while reducing risk. We have actively invested in international markets for more than 20 years. Since 2014, Wespath has gradually reduced the home-country bias and has increased its exposure to international equities within a number of the funds it manages. We believe this positions participants and institutional clients to benefit from the growth potential of non-U.S. markets.

About Wespath Investment Management

Wespath Investment Management (Wespath) is a division of Wespath Benefits and Investments, a general agency of The United Methodist Church. Wespath provides investment solutions for the endowment and retirement plan (defined contribution and defined benefit) portfolios of United Methodist-affiliated institutional investors, including foundations, higher education institutions and health care organizations through a broadly diversified family of daily-priced funds.

Wespath’s investment process proactively incorporates the consideration of environmental, social and governance (ESG) factors into investments across asset classes and in the selection of external asset managers. Wespath's activities promoting sustainability include proxy voting, corporate and public policy engagement, and positive impact investing. As of September 30, 2017, total assets under management were approximately $23 billion.

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“ Wespath believes investing outside the United States improves our portfolio’s potential for higher returns while reducing risk.”

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