Optimizing International Allocations with Asia

Traditionally, public equity allocations made by investors reflect their home biases. In the U.S., we have seen up to 75% or more of an investors’ portfolios allocated to U.S. companies, either through direct investments and/or a managed portfolio. The remainder of their public equity allocation has typically gone offshore into an allocation of developed international equity strategies such as EAFE (Europe, Australasia, and the Far East) combined with a much smaller allocation to global emerging markets (EM) using either an active manager or an ETF (exchange traded fund).

Going forward, we believe that the traditional international allocation to EAFE and global emerging markets deserves a re-think.

Historical returns, economic growth rates, current and forward looking corporate earnings, capital market development momentum, future index representation, shifts in discretionary spending and consumption, and leadership changes in global innovation all point towards Asia replacing Europe as the second sphere of influence in global equities (the first sphere being the United States).

As such, in our view, current international equity asset allocation models (such as EAFE) which are typically biased towards financials, industrials and other cyclically oriented businesses could benefit from an equal allocation to the advanced economies of Asia—plus China—in order to add growth, innovation and exposure to new ”total addressable markets.”

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The Advanced Economies of Asia

An allocation to EAFE is meant to provide investors with exposure to the world’s most advanced economies outside the United States. An advanced economy is a term used by the International Monetary Fund (IMF).While there is no established numerical convention to determine whether an economy is advanced or not, having a high level of per capita income, a very significant degree of industrialization, a varied export base and a financial sector that's integrated into the global financial system are generally used to define an advanced economy.