Specialist tells investors to look overseas for diversification opportunities
Investors have been warned not to leave all their eggs in one basket and look towards international equities for vital diversification.
David Polak, equity investment specialist at Capital Group, admits this has been a hard sell given the relative strength of US equities but believes that, because of this, many people have allowed their portfolios to drift.
He said: “We think that many investors over that past 10 years in North America have probably not allocated to international equities and, as a consequence, their North American equities have gone up a lot more.
“If you look at those two assumptions, there’s a good chance, therefore, that people have a lower exposure to international equities than they did 10 years ago, simply because of the returns of the two markets.
“Don’t forget diversification, look and see if that has happened and if it has, have a think about rebalancing. And don’t try to time it; it’s always difficult timing markets. Average in if you need to but seek to find balance in your portfolio.”
Polak said investors don’t need a major downturn to feel the benefits of having a more international flavour, adding that could happen if US equities merely go sideways for a few years.
He said: “For the first part of last year, international equities began to work and that gave people what they needed – a little bit of encouragement that it wouldn’t always be a one-way street. But that seems to have faded and we are trying to ascertain whether that’s a short-term issue or a longer-term problem. I suspect it’s a short-term issue.”
Polak said that Capital Group finds opportunities across growth and value in Europe, emerging markets and Japan. Industries it likes include industrials, aerospace, chemical companies, luxury goods and software technology, while it’s relatively skeptical of European banks and telecoms.
Polak urged investors not to listen to the naysayers and instead view international equities as an opportunity.
He said: “We are being asked a lot for our views on international equities. I get the sense they are coming at it from the point of having a very high allocation and are wondering whether they should trim it back.
“The general question is that, after 10 years, this does seem to be an opportunity but it’s a very hard opportunity to sell to my underlying investors; simply because it’s done so badly relative to US equities.”
Polak also told investors not to be lulled into thinking that including an array of tech companies in your portfolio represents a diversified strategy, or into thinking that the NASDAQ’s good times will continue for ever.
He said: “The important point in our minds is to continue to think about diversification. If as an investor you have had all your eggs in one basket, let’s say you’ve invested in the NASDAQ index then, this year, you’ve done very well compared to everyone else. In fact, over the long term, you’ve done very, very well.
“And if you’ve invested in Facebook, Apple, Amazon, Microsoft, Google, Netflix, you’d have done extremely well. But that is not a diversified portfolio. Those companies are quite different in terms of their business models and the industries they represent.
He added: “Investors have gravitated toward these stories because you can see good, sustainable long-term unity growth, so people have been willing to pay up for that.
“But if the environment were to change, then you would have all your eggs in one basket.”