September 2017 Issue
Portfolio Patriotism — Domestic market optimism or inadvertent asset allocation?
Globalization of the world economy has increased exposure to international investments, yet equity portfolios in general remain largely home biased today. This may be a good time for participants to reevaluate their asset allocation to see if they may be exhibiting a home country bias— or displaying overly optimistic expectations about the domestic market and/or pessimism about foreign markets.
After years of mediocre growth from developed international equity markets, we are finally starting to see signs of life abroad. The margin of outperformance for U.S. stocks has been rather large over the past five calendar years. The five-year annualized returns for the MSCI EAFE¹ (NR USD Index²), a proxy for international stocks, is up 6.5 percent³, compared to the S&P 500⁴(TR⁵), a proxy for U.S. stocks, which is up an impressive 14.7 percent annualized. Year to date however, we are starting to observe a reversal as the MSCI EAFE is up 14.0 percent. Compare that to the S&P 500, which is up 8.7 percent6.
Why now? International equities are looking attractive from a valuation standpoint as the U.S. Cyclically Adjusted Price Earnings (CAPE7) ratio is well above its historic average (29.8x versus 16.8x respectively8). A global overview of CAPE can be seen in the chart to the right, suggesting the possible attractiveness of international equity from a valuation standpoint. This relative attractiveness is further supported with the expectation that domestic earnings will reach record highs within the next 12 months9.
Focusing attention internationally, the Eurozone domestic demand rose 2.8 percent year over year as of the first quarter. This is the highest annual growth rate since Q3 200710. The European Central Bank chief Mario Draghi ruled out further interest rate cuts in a sign that it’s moving closer to an exit from its stimulus program. Election results in the Netherlands, France and Germany reduced uncertainty over government agendas. Lastly, the United Kingdom successfully continues to reduce unemployment (4.60 percent11) in spite of last year’s Brexit vote.
¹MSCI EAFE® (Europe, Australia and Far East) Index - is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. As of December 2003 the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. EAFE is a registered service mark of Morgan Stanley Dean Witter, Discover & Co.,²Net returns U.S. Dollar,³Data from Morningstar,4S&P 500 Index is an unmanaged group of securities,5Total returns,6Morningstar. As of 5/31/2017. 7Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10,8http://www.multpl.com/shiller-pe/ ,9Q3 2017 JPMorgan Guide to Markets,10Global Purchasing Managers’ Index for Manufacturing,11https://ycharts.com/indicators/uk_unemployment_rate,12Fidelity recordkeeping system as of 12/31/16. For plans with $10-$20M in assets. Asset weighted average.13Map from: http://www.starcapital.de/research/stockmarketvaluation
Higher valuations and uncertainty around domestic political agendas underscore the need for broad diversification and careful portfolio management. However, when it comes to defined contribution (DC) investors and their equity portfolio allocations, the numbers tell an intriguing story. For the 2016 calendar year, the average DC participant12 devoted 86 percent of their entire equity allocation to domestic stock. As a result, it could be deemed that participants over-allocate to U.S. stocks by 33 percent14 when compared to the MSCI All Country World Index (MSCI ACWI Indexes offer a modern, seamless, and fully integrated approach to measuring the full equity opportunity set with no gaps or overlaps. MSCI ACWI represents the Modern Index Strategy and captures all sources of equity returns in 23 developed and 24 emerging markets) (as of 3/31/17). DC investors might not realize that sticking mainly with U.S. stocks can actually increase portfolio risk and simultaneously reduce returns.
The remedy may be more global equity exposure. If you buy into the concept of a reversion to the mean and that valuations look better overseas than here in the U.S., then you should not be surprised if international markets begin to outperform. By adjusting their portfolio balances more toward global equities, DC investors have the potential to increase returns by offering more exposure to fast-growing segments15 of the global economy while simultaneously increasing diversification.
Today, plan sponsors can help their participants strike a more appropriate balance by providing:
As Americans we’re all patriots, but when it comes to investing, leave home country bias at the door.
14MSCI All Country World Index,15In relation to GDP. For example, the Nominal GDP Domestically is around 2.1% versus the global GDP of around 5.7%. Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.
Women in Retirement: 60 Percent Not Saving Enough
In November 2016, the Texas Conference for Women surveyed attendees about their retirement savings and found that almost a whopping 60 percent weren’t socking away enough. In fact, many weren’t even sure if they were going in the right direction. One person responded, “I don’t know if I’m on track, and that’s the worst part.”
Many women are doubtful that they can retire comfortably, if at all. Consider these results of the 17th Annual Transamerica Retirement Survey:
Some of your participants may be facing these struggles as well. Retirement planning is a daunting task, and women have different struggles than men:
But it’s not just a gender issue: many Americans, men and women alike, struggle to prepare for retirement. Why?
Taking The Power Back
The outlook looks gloomy, but it doesn’t have to be. Encourage your female participants to sit down and review where they are. They need to learn and gain the knowledge needed to help move forward. Most of all, they should make a plan and write it down. Nobody would plan a cross-country road trip without a map to guide them. Participants shouldn’t approach retirement without a roadmap of how to get there.
For more information on financial wellness programs, please contact your plan advisor.
Auditing Recordkeeper Statements—A Fiduciary Duty?
Adhering to prudent standards includes auditing quarterly statements from the recordkeeper. However, there is no explicit requirement for plan fiduciaries to do so.
With regard to plan assets, fiduciaries have the explicit duty to ensure that:
Fiduciaries must act prudently in carrying out these duties. A bright-line test for the exact definition of prudent does not exist. It depends upon the facts and circumstances.
The plan trustee has the duty to keep plan assets safe. If you are the plan trustee, you should oversee how your recordkeeper handles plan assets. Auditing their quarterly statements helps to accomplishing this.
The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or to participate in any trading strategy. Any decision to invest according to investment advice provided by NFP should be made after conducting such investigations as the investor deems necessary and consulting the investor’s own investment, legal, accounting and tax advisors in order to make an independent determination of the suitability and consequences of an investment.
Mutual funds are sold by prospectus only. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund. The fund prospectus provides this and other important information. Please contact your representative or the Company to obtain a prospectus. Please read the prospectus carefully before investing or sending money.
The target date is the approximate date when investors plan on withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative was the fund nears target retirement date. The principal value of the funds is not guaranteed at any time including at and after the target date. Insurance Products: 1) are not a deposit or other obligation of or guaranteed by, any bank or bank affiliate; 2) are not insured by the FDIC or any other federal government agency, or any bank or bank affiliate; and 3) may be subject to investment risk, including possible loss of value. The observations and opinions expressed are those of the author and is for general information only. It is not intended to provide specific advice or recommendations for any individual. The “Retirement Times” is published monthly by Retirement Plan Advisory Group’s marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. (c) 2017. Retirement Plan Advisory Group.
The PRS Retirement Team
Gary Pinkerton, MBA, AIF®, CFP®, Institutional Portfolios Director
Pinkerton Retirement Specialists, LLC
2000 John Loop
Coeur d’Alene, ID 83814
208-667-8998 or 1-800-634-2008
Pinkerton Retirement Specialists LLC is a Registered Investment Advisor. SEC registration does not imply a certain level of skill or expertise.