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By Jeremy Glaser | 11-14-2012 12:00 PM

Why You Should Invest Beyond Borders

With more than 50% of the global market cap being outside the U.S., investors are missing good opportunities if they take a domestic-only approach, says Morningstar's Marta Norton.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. How much of your portfolio should you allocate abroad? I'm here with Marta Norton, an investment manager at Morningstar Investment Services, to answer this question.

Marta, thanks for taking the time today.

Marta Norton: My pleasure.

Glaser: So, let’s start kind of big picture. Why does it make sense just generally speaking for investors to think about putting part of their equity and fixed-income exposure abroad versus just having everything in the United States?

Norton: I think there are a few good reasons for that, but at the most basic level, you just have an expanded opportunity set. I mean, at this juncture you have more than 50% of the global market cap actually outside the U.S., so if you were to limit your strategy just to U.S. borders, you’re going to be missing on more than half of the opportunities that are out there. So, that's at the most basic level. You just have more opportunities if you cast a global net, but there is more to it than that. I mean, it's not just quantity; it's quality.

So, there are a number of industries where maybe the powerhouses are located inside the U.S. But there are others where there are big contributors to a particular industry, and they are actually outside the U.S. So, take drug manufacturers. Yes, Pfizer is [in the U.S.] and Johnson & Johnson is [in the U.S.]. But then you have companies like GlaxoSmithKline, a U.K.-domiciled company or you have Roche or you have Novartis, those types of companies. So if you were to limit your universe just to the U.S., you’d be missing on some of these top contributors in certain industries.

And then, I think just lastly, I think there is a matter of diversification. So, any one country has its own economic headwinds or tailwinds, and the U.S. is no exception to that. So, if you are able to expand outside the U.S., maybe you can kind of limit some of the risks, the challenges that the U.S. is facing. Of course, you have to remain cognizant that maybe you are introducing some to your portfolio, as well, but just by spreading it out a little bit more, you have greater diversification.

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