Are You Getting the Most Out of Your International Allocation?


An appropriate allocation to international equities in a multi-asset class portfolio can provide meaningful diversification and performance benefits. Manager selection is a critical component of your allocation strategy and risk management. One under-considered factor: many active and passive international portfolios have significant holdings in large-cap overseas companies with heavy exposure to the U.S. economy, undermining diversification.

An appropriate allocation to international equities in a multi-asset class portfolio can provide meaningful diversification and performance benefits. Manager selection is a critical component of your allocation strategy and risk management. One under-considered factor: many active and passive international portfolios have significant holdings in large-cap overseas companies with heavy exposure to the U.S. economy, undermining diversification.

The Hansberger International Growth Equity - Positioned

The Hansberger International Growth Equity strategy, managed by Hansberger Growth Investors (HGI), is well-established, bottom-up, and fundamentally driven. HGI, an employee-owned affiliate of Madison Investments, has been managing this strategy with several core team members in place for the past 22 years, and has featured an Ordinary shares strategy since 1996 and an ADR strategy since 2007. Highlights of HGI’s process include:

  • A boutique focus on international growth equities -- the only strategy that HGI manages;
  • Fundamental bottom-up security selection of quality international growth equities in a risk-controlled framework;
  • Alpha primarily generated via security selection;
  • High active share approach (80%+) vs. the MSCI ACWI Ex-US benchmark;
  • An historical tracking error vs. benchmark of 2-5%;
  • A portfolio turnover averaging 25-35% annually over a three- to five-year time period;
  • A minimum market capitalization of $1 billion allowing broad discretion to move among cap sectors in search of growth and attractive valuation;
  • An actively managed strategy with an appealing Sharpe Ratio vs. peers and a stronger non-U.S. bias than most International ETFs.

HGI’s security selection process begins with a proprietary screening model that filters Index constituents on key factors designed to identify potentially attractive, high-quality growth companies. This screening yields a list of top 80-100 stocks for further analyst research and validation of fundamentals. HGI’s experienced analyst team then researches each of these “Foundation Stocks” to investigate secular growth trends, profitability experience and potential, competitive forces/competitive advantage, and company capital structure. Using internally generated analyst research, 30-60 stocks that meet stringent guidelines for growth, earnings quality and valuation are selected for potential inclusion in the portfolio. Region and sector allocations are a byproduct of the bottom-up security selection process. Sector allocations are typically within +/- 10% of benchmark.

Why International Exposure Now?

International underperformance over the last eight years may have produced an unintentional portfolio allocation shift biased towards outperforming U.S. domestic markets at the expense of lagging foreign markets. Additionally, many large foreign companies have become increasingly tied to and dependent on U.S. markets, producing a stealth increase in exposure to the U.S. economy. As a result, re-visiting your portfolio’s foreign exposure seems sensible.

Our belief that International equities are timely is based on our read of several important indicators:

1. Valuations: Valuations of international equities are attractive relative to U.S. equities (PE FY2 Valuations).

2. Yields: Ten-year bond yields are less than dividend yields in developed markets outside of the U.S., supporting the case for higher demand in developed international equities.

3. Emerging market: Growth expectations, particularly in countries such as China and India, are expected to remain above those in the U.S. Exposure to emerging markets through selective investment in high quality companies should have a positive contribution to portfolio returns over the long-term.

4. Historical Trends: U.S. equities appear to be overbought and the U.S. market has relatively outperformed International equities since 2011. Historical trends suggest that, after long periods of relative outperformance in U.S. equities, this trend should reverse and International equities may then experience a period of relative outperformance.

In Conclusion

After several years of relative outperformance from U.S. holdings, many investors find their portfolios over-allocated to U.S. equities and under-allocated to foreign stocks. The indicators outlined above suggest that the timing is right for investors to review their portfolio allocations to ensure an adequate exposure to non-U.S. equities. The Hansberger International Growth Equity strategy, with its significant allocation to non-U.S. stocks, bias toward high quality growth equities, extensive experience in international markets over multiple cycles and bottom-up, high active share approach, appears well-positioned to participate in the resurgence we expect in non-U.S. vs. U.S. stocks.