Considering International Investments in Times of Market Volatility

During this period of heightened market volatility, active asset managers are marketing international and global equity strategies to institutional investors based on valuations and the value they could add to their portfolios, particularly in emerging markets and small-cap equities, says Alexi Maravel, director of institutional research for Cerulli Associates.

“With the volatility in the markets, there is a feeling that a lot of institutions have had a lot of exposure to U.S. equities for a long time and have benefited from that, just on a valuation basis,” Maravel says. “But international and emerging markets are undervalued relative to U.S. equity markets, so a lot of the institutional investors we talk to are reassessing their U.S. allocations.” Retirement plan investors should do the same, he says.

A survey that Cerulli sent to asset managers last month asked them where they expect to receive requests for proposals (RFPs) in the next 12 months. “The top strategy they expect to receive RFPs for is multi asset class solutions,” Maravel says. “The fifth highest was international and global equities. We are seeing a subtle shift of institutional investors moving their assets.”

Nigel Bliss, senior portfolio manager with Mondrian Investment Partners agrees that international investing is taking hold: “For investors with long-term time horizons, international equity markets offer diversification and present a meaningful opportunity, given the near decade-long outperformance of U.S. equities over international and the material overvaluation of the U.S. dollar relative to most market developed market currencies.”

Susan Czochara, practice lead, retirement solutions, at Northern Trust Asset Management, says her firm views “international investing in the context of retirement investors as a strategic move. We want to keep that long-term strategic focus broadly diversified in investments, including international. Risk and risk control are essential in down markets. Our research shows that a strategic portfolio that includes international will, over time, have a better risk-adjusted return. We think of it more from a strategic standpoint, especially as it relates to retirement investors.”

As to whether investors should seek out actively managed or passively managed international investments, Maravel says institutional investors are seeking out passive investors when the risk/return is low, that is “where it is easy to do passive replications. As you get further out on the risk spectrum into emerging or frontier markets, or small cap, you see less passive and the search for best-of-breed active managers.”

Northern Trust Asset Management views the active/passive debate slightly differently. “Our belief is that the debate around passive versus active presents a false dilemma,” Czochara says. “The best features of both can be found in factor-based investing. It is rules based and transparent, both of which you would find in a typical passive style, plus it offers a potential increase in returns over the index. That is what we believe is a great approach to use for both non-U.S. and U.S. exposure. As a pioneer in factor-based investing for nearly 30 years, we have seen how it provides excess returns.”