Is it time to rethink your exposure to the US?
It could pay to check your asset allocation, says David Prosser.
Make America Great Again? Irrespective of their politics, many investors will hope President Trump can begin to deliver on that promise when it comes to the stock market. His record so far in office has been quite the opposite – for much of the past 15 years, returns on US equities have consistently outstripped those from other markets. Since January, that has flipped.
The US stock market is broadly flat over the year to date – though that masks the huge volatility caused by the Trump administration’s tariff announcements in April. By contrast, several European indices have delivered double-digit gains, with Germany and Italy particularly strong (the UK is up around 7%).
If you think the experience of the past few months is a blip and that US shares will soon reassert themselves, why wouldn’t you want to maintain a high exposure to US equities?
David Prosser
It’s not what we expected. Analysts predicted a Trump presidency would boost US equities, with positive impacts from policies such as tax cuts, deregulation and support for big tech. So far, nothing doing.
Where do we go from here? Well, a new research paper published by economists at the hedge fund AQR makes an important point. There is nothing guaranteed about outperformance from the US stock market, it observes. The data in AQR’s research highlights a number of periods over the past 50 years or so when US equities consistently underperformed.
That’s food for thought for investors who currently hold high exposures to the US market. And that will be a large number of investors. Many vehicles that purportedly offer diversification across international markets are much more US-focused than is often realised. US equities, after all, account for close to 70% of the MSCI World Index. Even if you’re not a passive investor in a fund that tracks such indices up and down, there’s a good chance your international funds will be significantly weighted towards US equities.
Maybe that’s what you want. If you think the experience of the past few months is a blip and that US shares will soon reassert themselves, why wouldn’t you want to maintain a high exposure to US equities? On the other hand, if you’re not convinced the good times are returning any time soon – or if the volatility of recent months has left you feeling anxious – it could be time to make a change.
Either way, it’s vital that you understand the exposures in your portfolio. If you’re invested in an international fund – or a portfolio of funds or stocks managed on your behalf according to an international mandate – now is a sensible moment to take a good look at its current asset allocation. The geography of those allocations may surprise you.
Equally, maybe you want to leave asset allocation policy to a professional fund manager. That’s fine too, but make sure you’re in a fund where the manager is free to follow his or her convictions. Some funds – particularly large international funds – are little more than pseudo trackers, staying close to index weightings for fear of underperforming the market.
The Global sector of the investment trust industry is a good place to look for unconstrained funds. The investment policies and asset allocations of these funds varies enormously, with managers usually under much less pressure to conform to market norms.
Indeed, the typical Global investment trust currently holds around 50-60% of its assets in the US, but there’s huge variety. AVI Global Trust and Lindsell Train Investment Trust both have allocations of less than 10% to US equities, for example.
There’s no single right answer here. But if it’s diversification you’re after, investment trusts are fertile hunting ground. And at the very least, now is the time to think about your asset allocation. If we’re on the verge of a new era of relative outperformance from non-US markets, you may need to make some adjustments.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
