Author Topic: True US-International Allocation  (Read 2278 times)

zombiehunter

  • 5 O'Clock Shadow
  • *
  • Posts: 77
True US-International Allocation
« on: August 17, 2016, 08:56:25 AM »
I've read that the companies comprising the S&P 500 generate slightly more than 50% of their revenue from the US while the remaining slightly less than 50% is derived abroad.  For example: 
http://www.marketwatch.com/story/sp-500-companies-generate-barely-over-half-their-revenue-at-home-2015-08-19

Therefore a portfolio of an S&P 500 ETF/Mutual Fund (e.g. VOO) is already fairly diversified with respect to US vs. International allocation.  (Putting aside for simplicity that revenue is roughly 50-50 but the cost of that revenue may be different within the US vs. abroad, such that the allocation of net profits, which should probably be the focus here, may be the same or may be different). 

I would wager that a broader market ETF/Fund such as VTI/VTSAX derives slightly less of total revenue from 'intentional' as compared to the S&P fund, the logic being that smaller companies are more likely to be focused on the US rather than generating income from other developed or developing markets.

My question -- what's the corollary for this for International ETFs/Funds?  For example, VXUS is comprised solely of intentional stocks (and is more similar to the broader-market VTI in that it includes smaller and mid size companies, while VEU is slightly more concentrated on large caps, I believe).  The companies included in the fund must generate a significant portion of their revenue from the US, seeing as it's the largest single market in the world excluding the total EU.  Perhaps less than 50% though, as the US is just one of many markets for a major company like Samsung or Toyota, and some smaller foreign companies may not have much of a market in the US.  For illustration, the top 10 holdings in VXUS:

1       Nestle SA
2       Royal Dutch Shell plc
3       Novartis AG
4       Roche Holding AG
5       Samsung Electronics Co. Ltd.
6       Toyota Motor Corp.
7       Taiwan Semiconductor Manufacturing Co. Ltd.
8       HSBC Holdings plc
9       Tencent Holdings Ltd.
10       Unilever

For a simple portfolio that is 50% VTI / 50% VXUS, what is the 'true' allocation between US and Intentional?  Is there any way to go about researching this?  It seems possible that many people who are intending to hold x% of their portfolio in intentional equities may actually end up owning a higher percentage, due to the fact that such a significant portion of US equities' revenue is derived from abroad.  For example if you hold 70/30% in US/Intentional, it's possible that your true allocation is actually closer to 50-50 if the intentional equities generate less of their revenue in the US as compared to what US equities generate abroad.
« Last Edit: August 17, 2016, 08:59:13 AM by zombiehunter »

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: True US-International Allocation
« Reply #1 on: August 17, 2016, 09:25:48 AM »
The whole idea that international exposure from selling products overseas, acts as any type of replacement for actually investing overseas, doesn't have merit. It's just an excuse for people who want to justify a home-bias. Here's an excerpt from a recent post on it:

-------------------------------------------------
If Samsung beats Apple in the multi-billion smartphone business, how much will it help me that Apple also sells phones in South Korea?

It's nonsense to say that a companies participation in a market, is an excuse to not own all stocks in that market. I tried to find some correlation between companies with a strong foreign presence, and the performance of the international/domestic market, but was unconvinced. Looking at Fidelity's Export and Multinational Fund - FEXPX, which invests "primarily in securities of U.S. companies that are expected to benefit from exporting or selling their goods or services outside of the United States."



Let's look at the first three phases:

1. International greatly underperformed the US, so we would expect the export fund to be pulled down, yet it outgrows domestic.

2. International drop just about matches the US drop (might have dropped a bit further), yet the export fund is almost flat, not pulled downward.

3. International greatly outperforms the US, but the export fund is in-line with the US.

In short, you shouldn't make investment decisions, based on expectations like "US company share price with a strong foreign presence will be pulled by economic performance in those countries in the long run." unless you have data showing this effect (if it exists) is strong enough to make an impact on your portfolio. Do you have this data?
-------------------------------------------------

That said, the simple answer is the correct one. The true US/International allocation between a 50% VTI / 50% VXUS portfolio...is 50/50.
« Last Edit: August 17, 2016, 10:24:59 AM by Interest Compound »

zombiehunter

  • 5 O'Clock Shadow
  • *
  • Posts: 77
Re: True US-International Allocation
« Reply #2 on: August 17, 2016, 12:25:31 PM »
Thanks, appreciate the response.  Based on your reply it sounds like it shouldn't be an issue/consideration.

Do you have any position on the allocation between US and Int equities?  The 40-40-20 portfolio would suggest an equal divide, but I note that the Vanguard Target funds have a roughly 60/40 split. 

forummm

  • Walrus Stache
  • *******
  • Posts: 7357
  • Senior Mustachian
Re: True US-International Allocation
« Reply #3 on: August 17, 2016, 05:33:20 PM »
Thanks, appreciate the response.  Based on your reply it sounds like it shouldn't be an issue/consideration.

Do you have any position on the allocation between US and Int equities?  The 40-40-20 portfolio would suggest an equal divide, but I note that the Vanguard Target funds have a roughly 60/40 split. 

If you are going by market cap weighted allocation, then 50/50 is approximately that. VTWSX matches a total world allocation and is 53% US right now.

https://personal.vanguard.com/us/funds/snapshot?FundId=0628&FundIntExt=INT#tab=2

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 658
Re: True US-International Allocation
« Reply #4 on: August 17, 2016, 07:58:26 PM »
Thanks, appreciate the response.  Based on your reply it sounds like it shouldn't be an issue/consideration.

Do you have any position on the allocation between US and Int equities?  The 40-40-20 portfolio would suggest an equal divide, but I note that the Vanguard Target funds have a roughly 60/40 split.

I market-weight my equities. So about 53/47 US/International. Makes things really easy, once I set it, I don't have to rebalance! My portfolio, by definition, will never be unbalanced :)
« Last Edit: August 17, 2016, 08:00:05 PM by Interest Compound »

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2198
  • Location: EastCoast
Re: True US-International Allocation
« Reply #5 on: August 17, 2016, 08:56:35 PM »
You seem to confuse location of revenue with location of domicile. Yes, using funds based on the latter will throw it off if you use the former as a criteria. But that's usually not the way it's done.

Sent from my Nexus 5X using Tapatalk


aspiringnomad

  • Pencil Stache
  • ****
  • Posts: 776
Re: True US-International Allocation
« Reply #6 on: August 17, 2016, 09:56:07 PM »
All this international talk had me revisiting my asset allocation which currently sits at 60/20/10/10, US/Int'l/REITs/Bonds with an eye toward boosting the international allocation up to at least 30% at the the expense of US equities and perhaps REITs. While considering this, I noticed that my emerging market holdings sit at a paltry 3% of my total allocation as compared to roughly 18% for developed markets. So I decided to investigate how much EM I should hold and came across the Wealthfront blog post linked below that claims the US represents just 36% of world equity markets while EM represents 25% and developed markets round out the final 39%. Does anyone know how that squares with estimates I've seen here and elsewhere that the US is just over 50% of total world market capitalization? Thanks in advance.

https://blog.wealthfront.com/emerging-markets/

« Last Edit: August 17, 2016, 10:01:24 PM by dcmustachio »

nobodyspecial

  • Handlebar Stache
  • *****
  • Posts: 1469
  • Location: Land above the land of the free
Re: True US-International Allocation
« Reply #7 on: August 17, 2016, 10:34:17 PM »
The whole idea that international exposure from selling products overseas, acts as any type of replacement for actually investing overseas, doesn't have merit.
You mean if I'm Canadian and I have Nortel,Blackberry and Bombardier that's not a good strategy - even though they compete in the same markets as CISCO,Apple and Boeing?

WerKater

  • Bristles
  • ***
  • Posts: 337
  • Location: Germany
Re: True US-International Allocation
« Reply #8 on: August 18, 2016, 02:28:12 AM »
The whole idea that international exposure from selling products overseas, acts as any type of replacement for actually investing overseas, doesn't have merit.
You mean if I'm Canadian and I have Nortel,Blackberry and Bombardier that's not a good strategy - even though they compete in the same markets as CISCO,Apple and Boeing?
No, it means that having only Nortel,Blackberry and Bombardier and rejecting to also invest in CISCO, Apple and Boeing just because the former happen to compete in the same markets as the latter, would be bad strategy. Diversification beats non-diversification because it reduces random risks essentially for free.