Foreign big-cap value stocks outshine U.S. counterparts
Reprinted courtesy of MarketWatch.com
Published: May 6, 2015
To read the original article click here
Just as large-cap value stocks add significant value to U.S. stock investing, value stocks are also worthwhile internationally.
In the 87 calendar years from 1928 through 2014, U.S. large-cap value stocks compounded at 11.1%, compared with only 9.8% for the Standard & Poor’s 500 Index SPX, +1.49%, a blend of value and growth.
Large-cap value’s “value-added proposition” has been even greater internationally, at least over the past 40 years, as far back as we have reliable data.
From 1975 through 2014, international large-cap value stocks compounded at 14.4%, compared with 12.2% for the S&P 500.
(Because these measurement periods began in 1975, right after a major market decline, they include a few robust recovery years. Thus these returns are approximately two percentage points higher than the long-term results that should be expected.)
At those rates, a $100 initial investment would have grown to $21,762 in international large-cap value; in the S&P 500, $100 would have grown to only $9,962.
The combination of these two asset classes, rebalanced annually, had a compound return of 13.6%, and $100 would have grown to $16,494, increasing the return by 66% compared with just the S&P 500. While I don’t advocate this specific combination of asset classes by itself, it’s a fine example of the benefits of a little bit of well-chosen diversification.
When I looked at 15-year periods, I found similar results.
Over the 26 15-year periods into which we can divide this data, international large-cap value stocks compounded, on average, at 14.6%, making an initial $100 investment grow to $772. By contrast, the S&P 500 compounded at only 12.1%, enough for $100 to grow to $552.
A portfolio split equally between these two, rebalanced every year, on average compounded at 13.7% and grew an initial $100 to $682.
It’s interesting to me that the combination captured more than 94% of the gains of international large-cap value alone — and did so while reducing the level of risk (standard deviation) by 26%.
Also worthy of note: In the worst period for both asset classes (2000 through 2014), the S&P 500 compounded at 4.2% while international large-cap value stocks compounded at 7.2%. The combination, during this period, compounded at 5.9%.
I see this as another example of the beneficial effects of combining the S&P 500 with a higher-performing asset class. During the worst of times, this combination produced higher returns and lower volatility than the S&P 500 alone.
Even better news is ahead. International small-cap blend stocks, international small-cap value stocks and emerging markets stocks have also produced returns that improved on those of the S&P 500.
Next up: international small-cap blend stocks.
I will be speaking inVentura, Calif. for the American Association of Individual Investors on May 7 and again in Portland, Ore.on May 16. Each presentation lasts three hours.
Richard Buck contributed to this article.
Purchase on Amazon
Sound Investing Podcast