A domestic bias continues to characterize the majority of US investment plans, according to a recent study by Newton.
The report suggests a global approach across bond, equity and multi-asset portfolios could better serve investors’ risk and return objectives.
“Neither a bias against overseas investment, nor the demarcation of investments between domestic and international portfolios is appropriate in seeking fully to understand, manage or harness risk to the benefit of investors,” says Paul Markham, global equity portfolio manager at Newton. “Country risk is an important factor for investors to consider, but many of the risks to which investors are exposed are global in nature.”
According to Newton, investment opportunities, corporate revenues and earnings, accounting standards and capital markets are increasingly global in nature. Globalization is evident in patterns of returns from equity markets; stock-market sectors are performing more similarly, regardless of the markets in which they are located, the report notes. The report also states that the rising correlation between the performance of US and non-US markets reflects the global nature of opportunities.
“A global approach can provide the perspective that allows an investment manager to screen out the ‘noise’ that frequently characterizes financial markets and to identify the enduring themes that really matter in identifying investment risks and opportunities,” Markham say. “We anticipate that overseas markets will provide highly attractive opportunities to US-based investors in the years ahead.”
The report further states its belief that currency risks are not aligned with an investor’s geographic exposure and that historically, the correlation between movements in the US dollar and US equity market performance has been weak. Newton also believes corporate governance considerations cannot be made along geographic lines alonecorporate governance standards vary as much between one sector or company and another, as between one region or country and another.
“While we equate the case for a global approach with global portfolio construction, many of the assertions we make are applicable to most investors, including those who, for whatever reason, choose to separate their domestic and overseas investments, Markham says. Even when investing on a purely domestic basis, we believe a global mindset is indispensable.
Newton is part of BNY Mellon Asset Management.
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