When investors sit down with their financial advisor to construct an asset allocation, international equities are typically one of the major asset classes considered for a meaningful portion of the allocation. When it comes to determining how you are going to get that international equity exposure, there are no shortage of options. Among the most popular is to simply invest in a cap-weighted index fund like the iShares MSCI EAFE (EFA). However, as shown below EFA hasn’t made a whole lot of progress over the past year. Keep in mind that the MSCI EAFE, like all cap-weighted indexes, are driven by the mega-cap stocks in the index. In environments when the large and mega caps are doing well, an index such as this may be a great choice.
8/17/15-8/17/16
However, investors may wish to see if there are better returns in some of the mid or smaller cap international companies. To get a sense of where the best returns in international equities have come over the past year, we ran a query of ADRs from FactSet that trade at least $1MM USD per day on average. That gave us a list of 269 stocks with a market cap ranging from $261,353 MM to $362 MM. This is the USD market cap for the Underlying (or the Primary Security). All of the primary securities trade on foreign exchanges so the Market Cap numbers have all been brought back to USD so everything is apples to apples. I then broke the group of ADRs into thirds by market cap and looked at the trailing 12 month returns of the stocks. In the table below you will see the average, median, minimum, and maximum return for stocks in each of those thirds.
Source: FactSet. 8/17/15-8/17/16. Returns are inclusive of dividends, but do not include transaction costs.
Where has the action been over the past year? Clearly, the best returns have come from the smaller companies. A cap-weighted international equity benchmark isn’t going to do a whole lot for you there.
When advisors ask why it is that our Systematic RS International portfolio has done as well as it has, part of the answer is that we can invest in small, mid, and large cap ADRs. Some quick facts on our Systematic RS International portfolio:
- Inception 3/31/2006.
- Reached a 10-year track record in March of this year.
- Can invest in small, mid, and large cap ADRs from both developed and emerging international markets
- Holds 30-40 ADRs.
- Buys securities out of the top quartile of our ranks and sells them when they fall out of the top half of our ranks
- Allocations are determined by relative strength
- Available on over 15 SMA platforms, including Stifel, RBC, and Raymond James.
See below for the performance of the strategy over time:
As of 7/31/16
This portfolio is available as a separately managed account and a unified managed account at a number of firms. To receive the fact sheet for this portfolio, please e-mail [email protected] or call 626-535-0630.
1The performance represented in this brochure is based on monthly performance of the Systematic Relative Strength International Model. Net performance shown is total return net of management fees, commissions, and expenses for all Dorsey, Wright & Associates managed accounts, managed for each complete quarter for each objective, regardless of levels of fixed income and cash in each account. The advisory fees are described in Part 2A of the adviser’s Form ADV. The starting values on 3/31/2006 are assigned an arbitrary value of 100 and statement portfolios are revalued on a trade date basis on the last day of each quarter. All returns since inception of actual Accounts are compared against the NASDAQ Global ex US Index. The NASDAQ Global ex US Index Total Return Index is a stock market index that is designed to measure the equity market performance of global markets outside of the United States and is maintained by Nasdaq. The performance information is based on data supplied by the Manager or from statistical services, reports, or other sources which the Manager believes are reliable. There are risks inherent in international investments, which may make such investments unsuitable for certain clients. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey, Wright & Associates.
