How Global Is Your Portfolio?

Slightly more than half of the value of the global stock market resides in non-U.S. firms, with the remainder in U.S.-domiciled companies. In reality, however, few U.S. investors mirror the global market's breakdown between foreign and U.S. companies; most investors have a bias toward their home country.

Posting on the Portfolio Design/Management forum of Morningstar.com's Discuss boards, I recently asked Morningstar.com readers to share how global they've made their portfolios. In response, many posters noted that they had a "home-country bias" with 2-to-1 and 3-to-1 ratios in their equity portfolios (meaning that their portfolios held between one third and one fourth of their equity assets in foreign firms with the rest in the U.S). Others said that they were running truly global portfolios. Some posters noted that they'd recently downplayed foreign markets because of uncertainty about the euro crisis and other macroeconomic factors, while bargain-hunters said that they'd recently upped their foreign allocations in the view that valuations were more attractive overseas than in the U.S. Finally, some readers noted that distinguishing U.S. and foreign companies by country of domicile is an outdated concept: Where companies earn their revenues is a better representation of their geographic positioning.

To read the complete thread or share your own strategy toward globalizing your portfolio, click here.

Those Are the Companies I Feel Most Comfortable Investing In
Packer707's 37% foreign/63% U.S. weighting was representative of many other posters' and also syncs up with the general guidance of many institutional asset-allocation providers, including the allocations in Morningstar's Lifetime Allocation Indexes.

JasonSyth's portfolio has a slightly lower foreign-stock weighting, 25% of his equity portfolio, but he's comfortable with a home-country bias.  He wrote, "Obviously, our foreign equity weighting is much lower than the 55% of global stock market capitalization. We do add more money to international stock funds with every paycheck, but currently I'm only comfortable with it growing to no more than 30% or 35% of our portfolio. When I look at the holdings of the S&P 500 Index, those are the companies that I feel most confident investing in. Also, I think that, while the U.S. will struggle, it will still perform better than many other countries in the upcoming years."

Mr. Ed, with roughly one third of his portfolio in foreign stocks, hinted at the fact that maintaining a portfolio's foreign weighting in line with a specific target can be an ongoing project. He wrote, "During 2011, I maintained a 2-to-1 ratio by directing new contributions in my 401(k) to the MSCI EAFE Index and emerging markets, almost exclusively. In my wife's 403(b) all new contributions went to the S&P 500. So the global ratio, as you named it, stayed the same."

Practical considerations--a dearth of international options in a company-retirement plan--have limited Juris2's foreign-stock weighting. "This year I've shifted some equity funds toward international, specifically into emerging markets and half of my monthly contributions to my 403(b) are now going into EM. But cumulatively I'm still overweight in the U.S., at 71%. I'd like to be more on the order of 50-50 but do not like the international/global options in my base 403(b)."

The Globetrotters
Other posters noted that they're more or less matching the global market's split between foreign and U.S. stocks.

Bschutz maintains a roughly equal split between U.S. and foreign stocks, with sizable exposure to emerging markets. "I have a target of 50/50 U.S. versus foreign, and divide my foreign roughly 50/50 between emerging markets and 'other.' I am comfortable fluctuating plus/minus 10% from those targets and even more on occasion."

Floydguy has a truly globally diversified portfolio, across both equities and fixed income. (Most posters focused on equities in addressing the question about U.S. versus foreign allocations.) "In equity I am about 55% foreign and 45% North America. The foreign stake is heavily tilted to Asia and developing markets. On the bond side I am probably close to 50% U.S./50% foreign. I hold a large chunk of emerging debt, whatever the guys at  Templeton Global Total Return (TGTRX) are buying and  SPDR DB International Government Inflation-Protected Bond (WIP)."

Rlovendale's U.S./foreign equity split is roughly the same, though within that foreign stake there's a bias toward Asian equities and away from Europe. "I am sitting right now with about 45% of my equity exposure in the U.S. and 55% international. 25% is in Asia ex-Japan as I feel that offers the most growth potential over the long-term (getting my exposure through  Matthews Asia Dividend Investor (MAPIX) and  Matthews Asia Small Companies (MSMLX) mostly). Europe exposure is around 10% of equity. My managers are also finding value in Japan."

Other posters have emphasized foreign stocks even more heavily. Chang is one such investor, with a particular emphasis on Asia. "My target allocation is around one third U.S, one third Asia Pacific (including Japan) and one third rest of world. That's an intentionally Asia-centric approach. I'm not quite there (I'm about 55/45 foreign/U.S.), but it's my eventual target."

Pauldorell cited one of the largest foreign weightings of any poster, with sizable foreign-stock and –bond positions. "My equities are approximately 20% U.S. and 80% foreign. My fixed income is approximately 85% U.S. and 15% foreign. I would have more foreign bonds, but I prefer buying individual bonds, and that's difficult. Most of my U.S. bonds are individual, and most of my foreign bonds are in a local currency emerging market bond fund. While I don't think the U.S. is about to go off a cliff economically, the party is slowly drawing to a close. There are plenty of good investment opportunities throughout the world at no greater risk than here. The U.S. is just as prone to bubbles as anywhere else and is still suffering from its most recent, and many other countries currently have stronger economies and less debt. In addition, the dysfunction in Washington makes it unlikely that the U.S. will be able to deal effectively with a variety of issues going forward. Frankly, I'm surprised at how little others invest abroad." 

More than a few readers noted that they've bumped up their foreign-stock weightings as they've slumped during the past year; they've redeployed assets from U.S. stocks, which have performed relatively better.

Zweb2011 shared, "Recently my non-U.S. percentage has been going up, and my U.S. percentage has been going down. That's simply because as U.S. stocks get fairly valued, I am selling U.S. stocks but European stocks are lagging so still holding them and accumulating them slowly."

FidlStix is on the same valuation-conscious page: "With U.S. equities looking a little richly valued, I'm once again looking overseas, especially at emerging markets.  WisdomTree Emerging Markets Local Debt (ELD) is a recent acquisition in bonds, and I'm about to pull the trigger on either  Wisdom Tree Emerging Markets Equity Income (DEM) or  WisdomTree Emerging Markets Small Cap Dividend (DGS). The latter is more 'grab the tiger's tail and hang on tight,' but I'm nudging my whole portfolio a notch or two lower on the market cap scale."

Other readers noted that they've bumped up their weightings in value-oriented foreign-stock funds in an effort to take advantage of bargains overseas.

Climbert wrote, "I have 30% of my retirement portfolio in foreign investments, using  Oakmark Intermational (OAKIX) as my proxy. Similar to David Herro's strategy, I put more into the fund while it was down."

Racqueteer, after backing off of a balanced equity weighting during the past year, has recently been boosting his foreign stake once again. "I was about 35% foreign, 35% U.S. equity early last year, but the summer swoon, followed by a recovery that was obviously earlier and stronger in the U.S., caused me to de-emphasize foreign. I probably got down to something like 15% foreign, 45% U.S. equity. I am now at 20% foreign, 35% U.S. equity, and in the process of reversing that previous adjustment; beginning with an increase in emerging markets equity over the last four months. I'm still a little leery of Europe."

Dabignip has taken a similar tack: "I reduced international equity exposure last year. Over the last few months, I have also been raising cash by selling U.S. equities into this rally."

Yet other posters remain concerned about what they view as structural problems in certain overseas markets; they think the U.S. is in relatively better shape. Awrs56 wrote, "Last year, I reduced our foreign-stock holdings by 50%, and recently sold most of the remainder. I just feel the questions about China and Europe pose too much risk for us at this point."

Rossinator also remains unenthused about the prospects for foreign markets. "I reduced my foreign exposure about a year ago, and I can tell you that I am in no hurry to go back to previous allocations. Part of that is that I am very confident/comfortable with my U.S. exposure and feel there is a lot more uncertainty in foreign exposure and that will remain true for a while."

'The Marketplace Is One Big World'
Several posters observed that country of domicile is no longer very meaningful when attempting to assess the geographic footprint of a firm. Dferry01 opined, "The foreign/U.S. allocation question is difficult to answer properly without digging into geographic revenue figures. Where a firm is headquartered and where a firm's earnings come from aren't always the same place. For the past decade, over half of GE's revenue has come from outside the United States, and that figure is increasing. Meanwhile, Cochlear ADR (CHEOY) is ostensibly an Australian 'foreign stock' that gets most of its revenue from the United States. And should  ArcelorMittal (MT) be considered a Luxembourgian company?"

OceanMinded agreed that when one considers where companies earn their revenues, a portfolio might be more global than what it appears at first blush. "I have around 25% of the equity portion of my portfolio invested in foreign stocks with a slight tilt toward Asian equities. Looking at my Stock Intersection report [found in Morningstar's X-Ray tool], the majority of my top holdings are earning a decent amount of revenue overseas-- Coca Cola (KO),  Procter & Gamble (PG),  Cisco Systems (CSCO),  Apple (AAPL), and  ConocoPhillips (COP). so to answer your question, I have less exposure then the global stock market capitalization of 45% U.S./55% foreign, but my exposure overseas is a lot higher then what Morningstar's X-ray suggests. I believe it's a safer route to own U.S.-domiciled companies that are expanding in faster-growing economies like emerging markets. Coca-Cola is a great example of this."

Saltydog is also content to obtain international exposure via U.S.-based multinationals. "I only have two 'foreign' stocks,  GlaxoSmithKline (GSK) and  Novartis (NVS), both with extensive operations in the U.S. One of my investment screens is that the company have global operations, for example, Coca Cola,  Colgate-Palmolive (CL),  ExxonMobil (XOM),  General Electric (GE),  H.J. Heinz ,  3M (MMM), and Procter & Gamble. Many such companies have over half of their revenues abroad. That makes them 'foreign' or global, yet they are regulated by the SEC, have American accounting conventions, easily accessed information. Why bother with 'foreign' stocks when I can get a global portfolio with U.S. stocks that I can understand?"

TaylorZR noted that he has invested in go-anywhere world-stock and world-allocation funds for exactly that reason. "The marketplace is One Big World," he wrote.

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