Paul Dietrich's Global Investing Trends Report

How Much To Diversify Our Portfolios Outside The U.S. Market?

Posted September 6, 2007 · 0 Comments

Dear Paul,


Given the recent turmoil in the U.S. stock markets because of the subprime mortgage scandals, how much should an investor diversify their investment portfolios outside of the United States?




The impact of the so-called “sub-prime mortgage crisis” on the U.S. stock market-remember that sub-prime lending is a very tiny piece of the overall economy-serves to remind us that investing in a single country heightens the volatility and risk EVEN when that one country is the United States!


This is why almost every academic study points out that global diversification is the secret to managing risk in any investment portfolio.


Heidi Hu, CFA, Principal, Managing Director, Director of Fixed Income at Transamerica Investment Management told a large gathering of investment professionals in Las Vegas last Spring that “The larger the universe one is investing in, the greater the opportunity for returns. A large universe also dampens volatility.”




According to the WALL STREET JOURNAL (9/1/2007), “a commonly cited statistic is that U.S. stocks comprise roughly 50% of the total value of the world’s stock markets.”


Asset-allocation experts look at the question in terms of the amount of international holdings that provide the maximum amount of diversification.  Since most of the world’s economies are growing faster than the U.S a 50%ó50% allocation would not be out of line.


However, views differ; Vanguard’s research advises clients that they should all have “at least” 20% invested internationally.


AllianceBernstein Holdings’ Thomas Fontaine recommends that their clients “have a minimum” of 30% of their holdings in non-U. S. stocks.  “At that level, you have a portfolio with less risk and with modestly higher expected returns.”




Again, the WALL STREET JOURNAL stressed, “it is important to diversify around the entire globe.  The most recent downturn highlights how there can be big differences among non-U. S. countries.  Funds heavily weighted in Asia held up better than those with big exposures to Europe, and indeed, even better than many focused in the U.S”


According to research from OppenheimerFunds, developed markets outside the U.S. still offer a 13% discount when compared on a price-to-earnings basis with the S&P 500 Index.


International markets are still “cheap on a long-term basis,” says Kurt Wolfgrueber, chief investment officer at Oppenheimer.




At FOXHALL CAPITAL, we look at global diversification a little differently and with a broader view of the world’s investment risks.


Our current global asset allocation for our FOXHALL GROWTH STRATEGY is 60% is allocated to “developed markets” in the U.S Europe and Japan with about two-thirds of that allocation to the U.S.  Approximately 30% is allocated to the fastest growing economies in the world in Asia and other emerging markets.


We then balance global risk by allocating 10% to global “hard assets” like oil, real estate, gold and other precious metals.  These commodities often run counter cyclical to the world’s stock markets.  These commodity investments often rise when stock markets decline.  They provide a small amount of insurance given all the political and economic risks in our world today.




As they say, “there are no guarantees in life other than death and taxes.”  However, I believe that the FOXHALL CAPITAL strategy of global diversification, coupled with our commitment to decisively move our client’s investment portfolios to bonds or money market funds in order to protect their investment capital when there is a major stock market correction, bear market or recession.  At FOXHALL CAPITAL, we are convinced that this is the best risk management methodology in any investment strategy available today.


Until next week…


-Paul Dietrich



Disclosure:  The opinions and portfolio information provided in the Foxhall Global Outlook are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security.  Client accounts may differ from model allocations due to many reasons.  All investment strategies offer the potential for loss as well as gain.  Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing.  Past performance is not a guarantee of similar future performance.


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About Paul Dietrich
Paul Dietrich is the Chairman, CEO and Co-Chief Investment Officer of Foxhall Capital Management, Inc. (Foxhall).  Foxhall currently manages investments for individuals, mutual funds and private institutions throughout the United States. Paul Dietrich is also a portfolio manager to a publicly traded mutual fund, the Foxhall Global Trends Fund.
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