The policies and conditions governing market behavior are evolving rapidly, and risk assets in the United States have outperformed their international counterparts for several years. Following that extended period of out-performance, our research team reexamines the case for a diversified global investment portfolio.
The summary below outlines our current views on the case for a diversified global investment portfolio. To read our full white paper on the topic, please click here.
We see the conditions governing market behavior evolving rapidly. Global markets and capital flows are progressively more interconnected, but the local conditions of each market vary materially. This is driving more and more dispersion between markets globally.
Policy has been and remains a driving force of market performance. Compared with the past five years, markets are entering a new regime where global policy makers are no longer perfectly in sync. While the U.S. prepares to tighten monetary policy, most other countries are attempting to provide more accommodative and market friendly economic conditions.
Since 2011, we have seen U.S. Assets set the pace in global equity returns. Master Limited Partnerships (MLPs), have been at the forefront, as illustrated below.
The U.S. has been a notable source of economic and market strength for the past several years. After two marked years of out-performance, there are significant gaps between assets in the U.S. and those abroad.
Over the past two years, the S&P 500 has outperformed everything, with the notable exception of MLPs, where we were overweight. We reduced MLPs due to valuation concerns in 2014, and we have similar concerns about segments of the U.S. today.
Below is a heat map of the best performing asset classes year over year. What becomes clear is that the top performers change dramatically over time.
In light of the valuation differentials present in international equity markets, particularly in Emerging Markets, we believe the case for globally diversified asset allocation is as strong as ever. It may take some time yet for these differences to play out; nonetheless it would be the exception, not the rule, to see the U.S. continue to outperform everything as it has for the past two years.
This is not a call to abandon the U.S. market. While valuations are high relative to other places in the world, there is some justification given the strength of corporate balance sheets, improving profitability, and growth. We were underweight the S&P 500 in 2013-14, but we did own baskets of high quality dividend paying stocks and MLPs, which performed in line with that index. Furthermore, we have invested in a handful of credit opportunities which generated equity-like returns for what amounted to significantly lower risk in our assessment.
We continue to balance our portfolios to be defensible and profitable under a variety of market conditions. With policy dynamics evolving, seemingly rapidly, we are seeing a shift in market behavior. We view markets as more prone to abrupt disruptions and find ourselves in an environment where balance and prudence are the order of the day.