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Don’t Count Out World Allocation Strategies Just Yet

What history shows us.

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A punitive decade for the world allocation Morningstar Category exasperated investors and contributed to outflows, mergers, and liquidations over that period, but as Joni Mitchell once sang, “I’ve looked at life from both sides now, from win and lose and still somehow, it’s life’s illusions I recall, I really don’t know life at all.” Same could be said of the world allocation category, whose constituents must hold at least 40% in non-U.S. securities and allocate across stocks, bonds, and cash. These structural biases translate to a performance profile that is either starkly advantaged or disadvantaged relative to more geographically concentrated alternatives. With this in mind, we’re asking: If the category’s poor showing for much of the 1990s was followed by more attractive 2000s, is a similar shift possible following the category’s poor showing in the 2010s? Does the category contain compelling options for investors despite these challenges?

Let’s Start With the Market Context
Consider the world allocation Morningstar Category not only relative to its disappointing recent history but also over multiple decades and market cycles. The 2010s' decade was characterized by an epic equity bull market, during which U.S. stocks outperformed global indexes by more than 100 percentage points. Morningstar analyst Dan Sotiroff provides an explanation that identifies three factors--a strong U.S. dollar, more exposure to red-hot tech names in U.S. indexes, and fundamentally stronger earnings for U.S. companies--as contextualizing that performance. U.S. fixed-income indexes also topped their global peers, with multiple eurozone debt crises occurring in Greece, Spain, and Italy, among others. This culminated in a sizable divergence in 2014, which saw the Bloomberg Barclays Global Aggregate Bond Index return just 0.6%, compared with 6.0% for the Bloomberg Barclays U.S. Aggregate Bond Index. Aside from that year, the indexes largely moved in line with each other.

Thomas Lancereau does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.