Eaton Vance
August 04, 2016
Eaton Vance provides advanced investing to forward-thinking investors, applying discipline and long-term perspective to the management of client portfolios.

Five fallacies of international investing

Paul Bouchey, CFA                                                                                                                         Chief Investment Officer, Parametric

Seattle -  Investors should always be careful about basing decisions solely on well-worn market proverbs such as “Sell in May and go away.” Lately, I’ve heard many false claims related to international investing that are blithely passed off as truisms.

To correct some of these misconceptions and mistaken beliefs, I put together this list of five classic fallacies of international investing:

  • You need “boots on the ground:” There is this myth about globetrotting investment managers – that they supposedly travel to exotic locales to inspect factories wearing a hard hat to find undiscovered companies. Yes, for private equity deals, infrastructure projects and private real estate investments, it makes sense to have focused local knowledge. But, with over 70 liquid equity markets in the world, you would need a lot of boots on the ground to actually realize this vision. If you’re investing in a publicly traded stock, you don’t need boots on the ground.
  • Avoid low-quality companies:  Unfortunately, there is not a strong link between “good companies” and excess returns on stocks. In fact, usually it is the cheap stocks of unattractive-looking companies that have better return prospects. But, even this “truism” is not always true, as the recent performance of the value indexes will attest.
  • Maintain a high “active share:” A common refrain is that managers should have high active share, meaning their portfolios shouldn’t have a lot of overlap with the benchmark. In fact, there is no proven relationship between active share and excess return over the market index. Similarly, there is a view that active managers should concentrate their portfolios in a small number of high-conviction stocks. But, just being concentrated does not increase your chances of outperforming.
  • It’s all about the macro:  It does sound comforting to be invested in stocks that are domiciled in countries with a growing GDP and other favorable macroeconomic trends. Unfortunately, there are no strong links between economic growth and stock market returns. Macroeconomic forecasts, like other types of forecasting, have a very poor track record at timing markets and producing consistent excess returns.
  • Pay attention to politics and the media:  Political issues definitely have an impact on stock prices, but the relationships are not obvious. Attempting to time markets based on political analysis or by reading newspapers (or by scrutinizing billions of tweets) is a fruitless endeavor.

Bottom line:  In contrast to these fallacies, one attractive approach to international investing is broad diversification – investing in every country, in every sector, across thousands of stocks.

Diversification does not guarantee profit or eliminate the risk of loss.

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