Blue Chip Partners: Quarterly Edge Q3 2024
07/15/24Company Retirement Plan Strategy for Long-term Success. Understanding Traditional vs. Roth 401(k) plans
08/12/24In this episode of Blue Chip NOW! recorded 07/18/24, Daniel Dusina, Matthew Mondoux, and Jonathan Johnson discuss the reasoning behind their underweight position in international stocks. The episode provides an in-depth look at their investment strategy and considerations for maintaining a lower exposure to international markets compared to benchmarks and typical advisor portfolios.
Introduction to Underweight International Stocks (0:03–0:35):
Daniel Dusina explains that being underweight means having a lesser exposure to an asset class relative to a benchmark. The average advisor has ~21% exposure to international stocks, while the BCP model is at ~8%.
Benchmark Comparisons and Methodology (0:35–2:42):
Matt Mondoux elaborates on being underweight relative to the global market cap, highlighting that the U.S. constitutes about 65% of the All Cap World Index (ACWI). He explains that their underweight position is significant when compared to global market cap and typical 401k target date funds, which usually have a 60-65% U.S. stock allocation.
Diversification and Geographic Exposure (2:42–5:01):
Daniel and Jonathan discuss the traditional methodology of diversification, noting that while they are underweight in explicit international allocations, many U.S. companies in their portfolio generate significant revenue from international markets. For example, McDonald's generates over half its revenue from international locations.
Revenue Exposure and Risk Management (5:01–7:21):
The team emphasizes looking at revenue exposure rather than just the domicile of companies. They argue that managing risk through a thoughtful approach to international revenue exposure can be more effective than simply checking diversification boxes.
Innovation and Market Performance (7:21–9:19):
Daniel and Matt discuss the lack of innovation in international markets compared to the U.S., particularly in technology. They note that the U.S. has driven consistent outperformance in the tech sector, making it challenging to find similarly innovative and successful companies abroad.
Sector Dominance and Valuation Gaps (9:19–11:35):
The conversation shifts to the dominance of financials and industrials in international indices, which often fetch lower valuations. They highlight that the valuation argument for international stocks has not played out, largely due to the lack of innovation driving earnings growth.
Diversification Benefits and Performance (11:35–12:15):
Matt points out that international stocks provided almost no diversification benefit during the COVID-19 downturn, questioning the rationale for maintaining significant international exposure if it underperforms during both up and down markets.
Investment Strategies and Target Date Funds (12:15–13:21):
The team discusses the importance of understanding the composition of target date funds and 401k allocations. They advocate for a more active approach to managing these funds, rather than a set-it-and-forget-it strategy.
Cost Considerations and Market Opportunities (13:21–14:16):
Jonathan raises the issue of higher costs associated with international investing due to different accounting rules and management complexities. He suggests looking for cheaper alternatives while still achieving diversification.
Potential for Changing Perspectives (14:16–19:00):
Daniel, Matt, and Jonathan discuss what might lead them to increase international exposure. They agree that seeing a leadership change in market performance and innovation spreading to international markets could be pivotal. They also note the importance of international markets attracting high-quality IPOs.
Conclusion (19:00–19:02):
Daniel wraps up the episode, encouraging listeners to check out their YouTube channel for more content and visuals.
Key Takeaways for Investors:
- Benchmark Comparisons: Understand how your portfolio's international exposure compares to global market cap and typical benchmarks.
- Revenue Exposure: Consider the international revenue exposure of domestic companies as part of your diversification strategy.
- Innovation: Recognize the role of innovation in driving market performance, with a current edge to U.S. companies.
- Sector Dominance: Be aware of the sector composition of international indices and its impact on valuations.
Stay tuned for more insightful episodes of Blue Chip NOW! where we continue to explore critical topics in the financial and economic landscape. Share this episode with friends and colleagues who might benefit from these valuable insights.
International Investing- a drag or diversification strategy?
A relevant way to invest internationally
In this episode of Blue Chip NOW! recorded 07/18/24, Daniel Dusina CFA®, Matt Mondoux CFA®, CMT, CFP®, and Jonathan Johnson CPA, CFP®, CMT explore the topic of international versus domestic stock investments. They discuss the concept of being underweight in international stocks, why this is their current strategy, and the various factors influencing this decision. The conversation spans the challenges of finding innovative companies abroad, the impact of multinational companies on domestic portfolios, and the role of benchmarks in investment strategies. They also touch on the historical performance of international markets compared to the U.S. and analyze potential shifts in market leadership.
Key Points From This Episode:
[00:00:00] Make sure investing internationally is actually worth your while.
[00:02:23] Explanation of what underweight means and how it is applied in their model.
[00:03:26] Comparison of U.S. and international market cap indices.
[00:04:02] Diversification strategies and the role of international stocks in a portfolio.
[00:05:28] The importance of multinational companies in providing international exposure.
[00:06:28] Revenue sources for domestic companies and their international exposure.
[00:08:29] The impact of U.S. innovation and technology on market performance.
[00:09:57] Challenges in finding high-growth companies in international markets.
[00:10:45] The sector composition of international indices and its implications.
[00:12:31] The diversification benefits of international stocks during market downturns.
[00:15:08] Exploring the conditions for increasing international exposure.
[00:17:09] The importance of innovation spreading to international markets.
[00:18:44] Challenges of attracting IPOs to international exchanges.
A message from the team:
We are underweight international stocks but NOT international economies. Our model weight is 8%, while the average advisor had an allocation of 21% last year. We are also underweight relative to global indexes. Or are we?
When we choose which stocks to invest in, we like to ask the question, “Where is revenue actually coming from?” Our approach to international markets at Blue Chip Partners leverages exposure to large U.S.-based multinationals instead of mimicking a traditionally weighted international segment. We are exposed to international economies in what we believe to be a more fruitful way by investing in domestic companies that have international reach. It makes it easier to manage risk if you’re investing in a way that blends in exposure instead of picking a country.
The target date funds/portfolio is your classic set-it-and-forget-it global “diversification” strategy. Target date funds are NOT how we diversify here at Blue Chip. To repeat, we’re underweight international stocks, but NOT international economies.
International Markets Are Dominated by Old-World, Low-Tech Companies
Innovation and success are mainly found in the U.S.
If you’re going to buy international stocks make sure it’s worth your while.
If you’re going to invest abroad, make sure it is targeted and you understand what you’re getting yourself into. Don’t just blindfold and throw 35% into international markets. Don’t follow the crowd without critically thinking. Hire someone that can do the research for you.
A clip from Blue Chip NOW! recorded 07/18/24 Featuring hosts Daniel Dusina CFA®, Matt Mondoux CFA®, CMT, CFP®, and Jonathan Johnson CPA, CFP®, CMT.
How Can International Exposure Provide Diversification If It Doesn’t Move Differently than the Rest of Your Portfolio?
International stocks have performed poorly since the financial crisis
A 25% allocation to international stocks is NOT helping you diversify. An exposure to non-U.S. holdings isn’t providing diversification if it tracks the domestic market in periods of stress. Also, international markets have not performed well in upward-trending markets in recent history. So why keep 1/4 of your portfolio in international stock holdings? We don’t.
Innovation is coming out of the US. Many U.S. companies are internationally invested themselves. This is our strategy at Blue Chip Partners.
A clip from Blue Chip NOW! recorded 07/18/24 Featuring hosts Daniel Dusina CFA, Matt Mondoux CFA, CMT, CFP®, and Jonathan Johnson CPA, CFP®, CMT.
Two Things You Can Do to Allocate Yourself Better in Your 401k.
401ks aren’t free. Your target date fund is potentially poised for underperformance.
Look under the hood and understand what you own in your 401k. Target date funds are good for what they are: they are easy. There may be ways to more prudently allocate your 401k than simply using target date funds.
It’s important to know what’s in your workplace retirement plan. This includes 403bs and 401ks, and its good to know what is in your 529’s age-based plans. Understand what’s in there, how much international is in there, and what options you can utilize to potentially improve the risk and return profile while still staying diversified. Fees should be heavily scrutinized as well.
The point of the matter is to know what you’re invested in, and it may not be in your best interest to blindly follow traditional academic suggested percentages.
A clip from Blue Chip NOW! recorded 07/18/24 Featuring hosts Daniel Dusina CFA®, Matt Mondoux CFA®, CMT, CFP®, and Jonathan Johnson CPA, CFP®, CMT.
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