US vs. Non-US: Why Diversify?

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2019 closed out another year of US equity (S&P 500) outperformance vs. its non-US counterpart, (MSCI ACWI ex US). In fact, the S&P 500 has outperformed the MSCI ACWI ex US index in eight of the last ten calendar years. This persistence may lead investors to question the relevance of maintaining a globally diversified equity portfolio. Notwithstanding this recent US outperformance, there are multiple factors to consider, including similar extended periods of non-US equity outperformance in the past, differences in sector compositions within the indexes, the impact of the US dollar, and narrow leadership within the US markets.

Recent Performance Overshadows Past Cycles

Relative asset class performance moves in cycles and currently, within global equities, the US is enjoying a superior run. Over the past ten calendar years through 2019, the S&P 500 index outperformed the MSCI ACWI ex US index by just over 800 bps (annualized) and outperformed in eight of the last ten calendar years. Looking back to the ten calendar years ending 2010, the MSCI ACWI ex US outperformed the S&P 500 index by more than 450 bps (annualized), and similarly outperformed in seven of those prior ten years. A review of rolling calendar ten-year periods highlights the cyclicality of returns. The S&P 500 outperformed the MSCI ACWI ex US over the preceding six rolling calendar ten-year periods, however the MSCI ACWI ex US outperformed the S&P 500 for eight consecutive rolling ten-year calendar periods prior.

Differences Between the US and Non-US Equity Indexes

There are notable differences with respect to the composition of the two indexes, adding to the discussion around the divergence in performance. Most recently, the Information Technology (IT) sector weight within the S&P 500 was 27.5%, more than twice that of the MSCI ACWI ex US at just 11.0%. The IT sector has been one of the best performing sectors in global equity over the last ten years, and many of the prominent IT companies are US domiciled. On the flip-side, the MSCI ACWI ex US index carries heavier weights to the more traditionally value-oriented sectors, such as Financials and Materials, and acknowledging these sector weighting differences as well as a low interest rate environment in the US that served, in part, as a catalyst to higher valuations for asset-light, long-duration equities (specifically growth-oriented technology stocks), this diversion in performance is easier to understand.

US Dollar Trends are a Factor

When investing outside the US, currency movements can further impact performance as US-based investors translate the performance of their non-US investments back to US dollars. When the US dollar is weak, the impact is positive, and when the US dollar is strong, the impact is negative. Over the ten years ending December 31, 2019, the impact of the US Dollar, which was generally in a strengthening trend, negatively impacted non-US equity returns by approximately 2% annually. For the ten years ending December 31, 2010, when non-US equities outperformed US equities, the US Dollar was weakening, providing an added benefit. Timing a reversal in the trend of the US dollar, or any currency is difficult. However, should a reversal occur, this will likely serve as an added tailwind to US investors holding non-US assets.

Narrow Leadership in the US – Diversification Outside the US

Within the S&P 500, leadership has been narrow in terms of names and sectors. By the end of 2019, Alphabet (Google), Amazon, Apple, Facebook, and Microsoft contributed 27% of the S&P 500’s cumulative three-year return. While not all are classified as IT companies, they arguably have elements of IT within their business models and benefitted from the aforementioned constructive environment (low interest rates). For US equity dominance to continue, either the growth rates must continue, or the valuation multiples mustn’t contract. The MSCI All Country World Index consists of nearly 3,000 stocks in 49 developed and emerging market countries, offering global diversification. Focusing on absolute returns by country highlights the differentiated return opportunities within this index. Over the past ten calendar years ending 2019, the top performing country has been from the emerging markets region nine times, and the one time a developed country topped the list, it was not the US. The US made the top ten five times with its best showing fourth in 2011.

Our Position

Maintaining a long-term focus, while following a strategic and diversified asset allocation program can help manage portfolio volatility and improve risk-adjusted returns. While the recent outperformance of US equities vs. their non-US peers has been clear-cut, abandoning a globally diversified approach could be shortsighted as history shows that relative performance cycles over time. This also is the case with foreign currency effects, which have been a recent headwind as well. The recent outperformance of the S&P 500 has been driven by a small number of stocks which seemingly would need to continue to drive the US markets higher. However, by including non-US equities, investors may increase and diversify their opportunity set.



The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein. Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements. The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.

Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put. The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.

Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees. This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is an Investment Adviser.


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