U.S. Investors Urged to Move Half their Stock Portfolio into European and Japanese Shares

Japan Investment Properties

U.S. Investors Recognize Potential in Japan RE Market

10 Aug, 2015 –

In their stock portfolios, Americans often have stuck close to home. Now, as they increasingly cross borders to buy shares, how far should they take it? The answer might startle some U.S. investors, who typically hold perhaps 20%, at most, of their holdings in non-U.S. stocks. A number of advisers are recommending much higher percentages—with some making the case that half or more of an investor’s stockholdings should be overseas.

Asset manager BlackRock Inc., BLK 1.69 % for instance, recommends investors keep between 30% and 50% of their stock portfolios in overseas shares. “The problem is, most U.S. investors don’t have anywhere close to that much allocated” to international stocks, says Russ Koesterich, BlackRock’s global investment strategist. Foreign holdings often come with risks, some of them severe. Still, with U.S. stocks at relatively high valuations, the gains available in a heavily American portfolio might be limited, some analysts say.

Pushed overseas

“If you look at the U.S., fundamentals are deteriorating in terms of the stock market,” says David Larrabee, a director at the CFA Institute, an association of investment professionals. He says that while there is no one-size-fits-all portfolio, in general investors shouldn’t have more than half of their stock investments in U.S. shares.

A strong dollar is compressing exports, rising labor costs are likely to hurt corporate profits, and interest rates are set to rise, he says. Plus, stock valuations in the U.S. are at their highest levels in at least six years by several measures, he says. Those valuations have helped push many investors toward international stocks. In 2014, a net $115 billion flowed into foreign-stock funds and ETFs, according to data from Thomson Reuters Corp. TRI 0.37 % ’s Lipper unit. This year, through July, investors have poured $134 billion into the category.

Some investors are looking for monetary policy abroad to give overseas stocks a boost the way low interest rates have contributed to the run-up in U.S. stocks in the past several years, says Gary Chropuvka, head of customized beta strategies for Goldman Sachs Asset Management’s quantitative investment strategy team, which manages $60 billion. Having seen how well U.S. stocks did as the Federal Reserve’s monetary-policy moves spurred economic expansion, “people are more and more convinced that there are a lot of similar opportunities to the U.S.” overseas, particularly in developed Europe and Japan, Mr. Chropuvka says. Efforts by the central banks of the European Union and Japan to boost their economies seem poised to succeed, along with a push in Japan for greater productivity and more effective corporate governance, he says.

Goldman recommends that the average investor keep about half of a stock portfolio in international shares. Within that allocation, it recommends putting about 5% to 15% of the portfolio in international small-cap and emerging-market stocks. “Those are mostly underrepresented in most U.S. investors’ portfolios,” says Mr. Chropuvka.

Weighing the risks

Of course, there are risks overseas. Mr. Chropuvka notes the continued possibility of destabilization in Europe because of the turmoil in Greece, uncertainties about Japan’s economy and the threat of China’s economic slowdown depressing global demand. David Wessels, an adjunct professor of finance at the Wharton School in Philadelphia, points to two concerns in particular: the risk that political upheaval in one country will provoke a withdrawal of international investors from shares in several countries, even though there may be little connection between the risks in the various markets; and the uncertainty surrounding monetary policy in the EU and Japan.

Still, Prof. Wessels says, the diversification foreign stocks provide is important. Adding them to a portfolio won’t necessarily lessen its volatility the way some other assets would, he says, because so many U.S. companies do significant business overseas that movements in the U.S. stock market tend to correspond closely to those in most major international markets. But, he says, “there are millions of people outside the United States entering their respective economies each and every year, and American companies have only so much exposure to these new consumers.” Buying foreign stocks allows investors to take fuller advantage of that trend, he says.

“Even just allocating to each of the G-20 economies would provide meaningful exposure to markets outside the United States,” he says.

Corrections & Amplifications

A quote from Mr. Chropuvka—“Those are mostly underrepresented in most U.S. investors’ portfolios.”—was incorrectly attributed to another Goldman executive in an earlier version of this article. (Aug. 10, 2015)

(Source – “The Wall Street Journal,” Pic – Tokyo Metro Govt Office Buildings / Sjors Provoost )

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