Even in our modern day of a connected world and easy global communication, many investors still have not embraced an international mind-set with their portfolios.

When compared to a domestic-only strategy, a portfolio with global holdings will, over time, earn a higher return for the same level of risk and/or produce less risk for the same level of return.

In a study by investment managers Gerstein Fisher covering 1999 to 2011, a globally diversified portfolio outperformed a U.S.-only portfolio in 96% of rolling three-year periods, with a total outperformance of 35 percentage points over 11 years.

Despite this evidence, most investors in the U.S. are still under-diversified and underweighted in international assets. According to recent industry reports, U.S. equities account for just 50% of the global equity market, with non-U.S. equities accounting for the other 50%. For investors with little or no allocation to international, this represents a significant underweight.

Here at Bank of the West, our Investment Advisory & Management team is recommending that clients revisit their equity allocation and look to rotate toward neutrality to U.S. and a slight overweight to international.

Further, clients should explore the use of a diversified mix of international asset classes to round out equity portfolios.

This is partly due to a global growth forecast of 3.7% by the International Monetary Fund, which is set to outpace U.S. growth this year.

Many international markets will likely grow much faster but are also further back in the recovery than the U.S., which means the future growth potential of those economies could drive higher equity returns for globally diversified investors.

For advisors looking to guide investors to adopt a well-balanced diversification strategy or recalibrating portfolios to take greater advantage of international assets, the historical evidence and economic data on global diversification can be persuasive.


Investors often express a preference for assets closer to home, often described as a “home bias.” This bias, which contributes to overweighing domestic assets, is rooted in the realities of investing globally five or 10 years ago, when the level of global investment analysis and the number of investment vehicles was more limited.

But times have changed. Today, there is much more focus and information on international sectors and the number of investment vehicles to invest in these areas is increasing every year.
The result is that investors can often achieve their global coverage objectives with just one strategic fund. For example, a single ETF can track a fully diversified international index and provide broad international exposure.

For more focused coverage of the largest, most financially developed countries, consider an ETF that tracks a developed-markets ex-U.S. index. Pair this with an emerging-markets ETF to broaden international holdings and drive diversification.

There are many other options, but the point is that achieving global goals can be relatively simple, low-cost, and targeted.

While there are many financial products that make global diversification easier than ever, the global investment landscape is expanding.


Investors can select from investments in more than 50 countries, and one of the questions I frequently address is how to distinguish the three international market categories: developed, emerging and frontier markets.

Understanding these categories is important for exploring the economic data and forecasts on international markets and for implementing investment strategies that meet the client’s preferences for risk and return.

Developed markets (United States, Europe, Japan, etc) are easy to identify. And even emerging markets, which include countries that are in the process of establishing a more mature marketplace and can encompass greater risk along with the potential for greater rewards, are pretty well known these days.

Frontier markets, however, are a little more vague. They essentially consist of companies and investments in nations that are less developed than emerging market countries, and many do not have their own stock exchange. As of April 2013, Morgan Stanley has a list of 34 nations that it classifies in this market, including Croatia, Tunisia, Vietnam and Jamaica. Historically, frontier markets have been the riskiest markets in the world in which to invest.


As I look back over the past decade, tracking international markets, one of the most significant trends is in the coverage and analysis available to advisors and investors.
There is a wealth of information and data, and it’s growing. But I think it’s important for advisors to distinguish direct reporting and analysis—where sources are on the ground—versus secondhand interpretation of data.

Much like I would place greater value on information on U.S. markets from U.S. analysts, I rely more heavily on professionals working in the regions or countries we are tracking.

At Bank of the West, we communicate regularly with our portfolio managers and banking partners around the world to compare information and shape strategies.

These are often very focused discussions on whether forecasts and projections are aligned with the realities of the local economy and how financial, political and other forces
can quickly reshape the economic situation.


One of the key lessons from working in this arena is the importance of actively managing international holdings—as tactical timing can be paramount in finding momentum that can carry specific markets downward, even as global growth accelerates or a regional economy is growing.

For example, as we look at emerging market countries, a real divergence has developed that requires careful attention. Some countries or regions, like China, are growing at or above 7% while others like Latin America are closer to 3%. And still others, like Brazil, are facing recessionary pressures. So it can be particularly helpful to develop sources that provide the level of market detail required to assess performance and recalibrate holdings as needed.

The advantages of global diversification are clear: the risk is in not utilizing international assets to manage risk and improve returns.

For investors currently adopting a global strategy, there is an opportunity to expand the share of a portfolio in international assets.

For investors who may be hesitant to consider international stocks, there is an opportunity to demystify the process of selecting and managing these holdings.

The bottom line is this: We believe global diversification can be a valuable tool to strengthen and grow client relationships.

Wade Balliet is head of the Investment Advisory and Management team at Bank of the West.

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