Overseas Markets Still Enticing

Given the high degree of uncertainty in the global economy, U.S. investors could be forgiven for having a bit of home bias these days. Europe's sovereign debt crisis and slumping economy, along with slowdowns in China and other emerging markets, make the U.S. look stable by comparison. 

Yes, the fiscal cliff stands immediately before us as a potential source of trouble, but at least the U.S. economy has been moving in the right direction, with slow but relatively steady economic growth and an improving outlook for the long-dormant housing sector.

As part of Global Investing Week on Morningstar.com, we asked users how much of the equity portion of their portfolios was invested abroad and if they felt any home bias toward U.S. stocks. Despite the uncertainty roiling foreign markets, those posting to our message board by and large remain bullish on non-U.S. stocks. Many reported having 50% or more of their equity holdings invested abroad, while some questioned whether the foreign/domestic distinction still has meaning.

To read the full discussion, click here. 

Sizing Up the Allocation
Many readers shared their foreign equity-allocation numbers, and some provided the rationale behind them.

"I divide roughly 50-50 (+/-10%) between domestic and international equities," bshutz wrote. "Now, I'm closer to 60-40 domestic because of recent outperformance of domestic. I also have general targets of 50-50 between foreign overall versus foreign emerging and large-cap versus small-cap in all markets. Maybe that is more because of the numerical simplicity than any complex strategy."

Chang had one of the highest allocations to foreign stocks among those who shared them, with one third in U.S. stocks, one third in Asia, and one third in other foreign markets. "Why the overweight in Asia?" he wrote. "It is a huge and very diverse region, as well as a growth region containing many economies ranging from highly developed to emerging to frontier. The middle class is really just coming into existence throughout Asia."

Richendric seemed to agree and turned the question of home bias on its head. "Demographics portend an increasing pool of international investors, such as those based in Asia-ex Japan," he said. "I do believe that they will have a home bias in investing. That's why I am gradually increasing my overall foreign equity allocation there from 10% to 20%."

Galeno mentioned using the  Vanguard Total World Stock Index ETF (VT), which currently holds about half of its equity allocation outside North America, as a benchmark in making decisions on foreign-stock allocation.

One of the more interesting justifications for investing outside the U.S. came from Chief K, who noted that nearly all the cash and bond portions of their portfolio are invested in the U.S., and that Social Security benefits, military pension, and current employer are all U.S.-based, as well.

Pessimistic About Europe, Optimistic About Asia
As we saw earlier this month when we asked users about their 10-year market forecasts, many are skeptical that Europe's economic problems will end anytime soon. 

Sentiments expressed by dragonpat, who is looking to the East rather than the West for strong future performance, were shared by many. "Sixty-one percent of my equity portfolio is U.S., 39% is foreign," she wrote. "I don't think that developed Europe can come back out of the dumpers anytime soon, but I think that Asia especially looks promising."

"My basic asset-allocation assumption is one third each U.S., EAFE, and emerging markets," wrote Aalan88. "But I make tactical departures from this base. This year, with Europe and Japan in obvious doldrums, the formula has been much simpler: About 40% of my (net hedged) equity is in non-Japan Asia and emerging/frontier markets. The rest is in domestic high-yield dividends (utilities, master limited partnerships, business development companies, REITs)."

Academic was a notable dissenter when it came to the outlook for Europe, at least in the long run. "Yes, the economic prospects look better for Asia and maybe the U.S. than for Europe, but in my opinion the price you have to pay for the better prospects is generally too high," Academic wrote. "I'd bet that over the next 10 years, Europe has the highest equity returns. Right now, emerging seems to have a decent combination of pretty good economic prospects and moderate equity prices." 

Darwinian seemed to agree, writing, "My target allocation has one third of my equities international. This has been a pretty good mix, for several decades, to get favorable risk-adjusted returns. I am a little above that now, for the reason cited by Academic--international stocks, especially in Europe, are good values. I haven't bought any U.S. stock (net) for three-and-a-half years, but I added some Euro stock this summer--it was too cheap to resist. I will buy more if it gets cheaper."

Is the U.S./Foreign Stock Distinction Dying?
Some readers questioned whether distinguishing between U.S. and foreign stocks was still necessary given the rise of global markets and multinational corporations.

Cogitarius wrote, "The distinction between 'international' and 'domestic' assets based on their country of listing is already meaningless thanks to the increasing dependence of so-called 'domestic' companies on 'international' revenues/profits/supply chains. For example,  Coca-Cola (KO) gets 70% of its sales abroad. Does investing in it exemplify home bias, or an expansive global investing outlook?"

BMWLover pointed out that investing in U.S. stocks with strong foreign sales is another way to gain international exposure. "As most of the U.S. large-cap stocks we own are very much international, I would say that close to 75% of our portfolio is invested in the international economy," he or she wrote. "I use U.S. large caps, such as  McDonald's (MCD), Coca-Cola, and  Yum Brands (YUM) to complement my international holdings like  Sap (SAP),  Unilever (UL), and BMW to make up my total exposure to overseas markets. I also use emerging market ETFs to diversify my exposure."

As these and other posters pointed out, calculating a portfolio's true exposure to foreign markets is more challenging today than it was in the past.

"By design I am roughly 50% domestic/50% international," wrote ShakAttack. "However, because domestic large caps get revenues from overseas and international companies get revenues from the U.S., I don't know what my actual international exposure really is. My assumption is that things balance out, and I'm back to 50/50."