Exposure to US Equities

[Max Power]

Hi Everyone. I have a high level of risk (6) in my pension fund. I am 100% in equities across a wide variety of sectors. However I have noticed that about 80% of these companies are US/North American. It has certainly been a great decade and many of these companies are of course global leaders but I'd be interested on hearing others views on exposure to US/North American equities.

 

[Sarenco]

About two-thirds of developed market equities (MSCI World), by market cap, are US equities.

I don’t see any compelling reason for a Eurozone investor to over-weight US equities.

 

[jpd]

Most of those "American" companies probably do a high proportion of their business overseas so are not 100% dependent on the US economy

 

[PMU]

Essentially your question is should you rebalance your portfolio away from US stocks back to some other asset classes. If you regularly rebalance you are taking a value approach to investment, i.e. you are selling your winners and buying losers and poor performers. If you just let your asset classes grow you are taking a momentum approach to investing.

There is a lot of academic research on this but most investors just know from experience that asset classes tend to mean revert over time to their long term average but also that asset class returns tend to continue increasing until they cease to do so. So basically you are weighing up the risks to your portfolio from value and momentum. When you rebalance for reasons of value / mean reversion, you are essentially betting that economic progress in the winning asset classes is stalling and that it should pick up in the poorer performers. So you are swapping your profits from the winners to buy assets in the poor performers. If they do so, you've had a 'free lunch', possibly the only one you can get in investing. If you rebalance for reason of momentum, you are betting that the asset class in question (e.g. USA (i.e. dollar-denominated foreign market) equities have had a 'good run' and this will now cease with the subsequent destruction of the profits you have gained by investing in and holding this asset class. So you rebalance into other asset classes thath you believe will now have their day.

So it really is a risk management exercise. I doubt anybody has the expertise to consistently and correctly determine that e.g. “'USA stocks are overvalued / have had a good run'” and “I'll now swap my profits into an poorer performing asset class that I know / hope / pray will increase in value / revert to its historic average”. So your stuck with a dilemma of balancing between value and momentum so as to maximize your return per unit of risk. Rebalance frequently and you incur increased transaction (and possibly taxation) costs but you reduce your exposure to valuation risks; rebalance infrequently and you minimise transaction costs but maximise your exposure to momentum risk.

 

[joe sod]

reasons of value / mean reversion, you are essentially betting that economic progress in the winning asset classes is stalling and that it should pick up in the poorer performers. So you are swapping your profits from the winners to buy assets in the poor performers. If they do so, you've had a 'free lunch', possibly the only one you can get in investing. If you rebalance for reason of momentum, you are betting that the asset class in question (e.g. USA (i.e. dollar-denominated foreign market) equities have had a 'good run' and this will now cease with the subsequent destruction of the profits you have gained by investing in and holding this asset class. So you rebalance into other asset classes thath you believe will now have their day

Very good explanation however it's actually difficult emotionally to do, you could have said that the U.S. has been overvalued for the last 5 years and the rest of the world undervalued. If you look at for example msci world index ex US it has been oscillating around the same value for last 5 years except in the last few months where it's really started to perform. Even though logically this is the correct strategy how many people would have sold the U.S. tech stocks (best performing sector) and bought European financials (one of the worst performers) for example .
There seems to be a definite change in sentiment now and a lot of chatter about "the great rotation" the switch of big money from the US and growth to value stocks (basically the rest of the world)
What's that good quote from Buffett " investing is simple but it's not easy"