The majority of institutional investors donâ€™t take advantage of international investment opportunities.
A recent Point of View online poll found that 75% of respondents feel that their international portfolios do not accurately represent the full range of investment opportunities available in the global market. And of those, the majority indicated that factors such as risk profile and investment guidelines prevent them from making changes.
According to Stefanie Hest, senior investment strategist, Northern Trust global index management group, the top U.S. defined benefit (DB) funds allocate roughly one-third of their portfolios to international funds. â€śConsidering global benchmarks, such as MSCI, allocate at least half of their index to non-U.S. markets, U.S. DB funds are leaving a significant amount of opportunity on the table.â€ť
For example, although investing in emerging markets small cap might be deemed too risky for certain funds, adding these securities can broaden diversification, thereby possibly reducing risk. In addition, the possibility of higher returns might justify the added risk.
Hest notes that developed small-cap, emerging small-cap and frontier sub asset classes â€” which comprise $2 trillion of market cap or 12% of the $16.5 trillion total international equity opportunity set â€” are less correlated to the global economy and can offer diversification to a portfolio.
â€śPerformance over the past decade also shows the attractiveness of frontier, emerging markets and developed international small-cap equities on a risk/return basis,â€ť Hest says. These asset classes have had higher returns, but with increased annualized volatility.
Investors should consider shifting to newer, more complete total international equity benchmarks, Hest concludes. In doing so, investors can incorporate a truly international equity mix into their portfolios.