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Dollar’s Surge Boosts Case for Global Diversification

By Murray Coleman April 14, 2015

Wall Street is bracing for what may be the first quarter of negative corporate earnings since 2009. And one of the main culprits — a nine-month surge in the dollar’s value — has advisor Michael Yoshikami talking to clients about the importance of diversifying their portfolios globally.

“As central banks around the world change their monetary policies, we’re trying to make investors aware that a rising dollar makes global diversification more important than ever, not less,” says the chief executive of Destination Wealth Management in Walnut Creek, Calif., which manages $1.5 billion.

It’s not always an easy case to make, given that U.S. stocks have led the global markets’ recovery since the meltdown of 2008. Domestic equities’ strong performance — average annual returns have been nearly three times those of international stocks — is reinforcing what Jono Tunney of Atlas Capital Advisors in San Francisco calls the “home-country bias,” which causes many clients to push back when their advisor recommends global exposure. Investors can be “blinded by a strong desire to chase short-term performance trends,” says Tunney, whose firm has AUM of $400 million.

So he tries to explain that the dollar’s 20%-plus run-up since last summer actually makes U.S. goods less competitive in world markets. Tunney also points out to clients that they’re already exposed to international economies, since the typical S&P 500 company gets more than 46% of its revenue from foreign markets. “The international component of U.S. companies’ business is going to do nothing but grow in the future,” he says.

Even before the dollar started reversing years of weakness, Tunney started gradually increasing his clients’ allocations to international equities. A typical moderate-risk portfolio managed by Atlas Capital now has about 34% invested in foreign stock funds. For more conservative investors, Tunney increases bond allocations rather than cutting back on international exposure. “If people want to limit risks, bonds are the way to do it — not by becoming less internationally diversified on the equities side,” he says.

At DWM, advisors are recommending that clients with moderate-risk profiles allocate at least 15% of their overall portfolio to foreign stocks — about three times what they were suggesting a few years ago. “Just as a weak dollar boosted U.S. corporate earnings over the last five years, there’s every reason to expect a stronger greenback to do just the opposite — create a growing headwind for domestic stock investors,” says Yoshikami. “We don’t see this as a short-term phenomenon.”

Michael Yoshikami

Advisors might also want to reassure clients who fear the strong dollar will turn non-U.S. equity gains into losses. So far this year, the major developed markets outside the U.S. are up about 18% on average in local currency terms, according to the Wells Fargo Investment Institute. Meanwhile, the dollar has risen about 10% year to date against a basket of other major currencies.

That means when U.S. investors convert their returns, they’re typically still up by 8%, according to Sameer Samana, the institute’s senior global strategist, who recommends that a balanced portfolio include at least 13% international stocks. He suggests that advisors with clients who are skittish about non-U.S. holdings should take advantage of the dollar’s surge to talk about the long-term advantages of global diversification.

“With a stronger dollar dominating foreign-currency markets, we’re getting questions from both advisors and clients about whether they should be shifting more heavily into U.S. stocks,” says Samana. “Our answer in most cases is no — they should follow a globally diversified and long-term oriented investment plan.”