American investors seem to prefer to hold stocks of American companies over shares of companies that are based elsewhere in the world.
According to a recent article in The Economist magazine, American fund investors hold just a sixth of their equity allocation in funds that invest in non-US companies.
Compare this to the composition of the global stock market, where nearly 40% of the total value of the global stocks reside in companies that are headquartered outside of the United States.
Are investors who eschew foreign stocks on to something?
During the past fifteen years, stock allocations heavily weighted to US shares have outperformed more balanced US / foreign stock allocations.
In the chart below, from JP Morgan Asset Management, the grey areas indicate US stock market outperformance.
But US-only stock fans should beware the purple!
Shares from non-US companies (EAFE stands for Europe, Australasia, and the Far East) have outperformed US shares for meaningful stretches in the past, as the purple sections of the chart above shows.
Researchers at AQR, a US-based investment firm, published an article in the June edition of the Journal of Portfolio Management which argues that, despite the current lengthy period of lagging US stocks, the case for international diversification remains strong.
A key point in the AQR article is that US stocks have gotten much pricier than shares of foreign companies (using time-tested means of valuing stocks), so investors are likely to be rewarded in the future by ensuring that their stock allocation contains shares of foreign companies.
Picking the ‘right time’ to buy or add exposure to any asset class is a difficult game.
But JP Morgan’s and AQR’s research make a strong case that a stock allocation incorporating a healthy portion of non-US stocks is likely to be good for your portfolio in the years ahead.