Alex Navarro concedes that advisors can be a bit U.S.-centric in choosing investments for their clients. But as a private financial advisor for 27 years, and a SunTrust advisor for the last 14 and a half years, Navarro believes it's his responsibility to balance his clients' portfolios with a sharp eye on the global financial market as a whole. To him that calls for including an array of international picks even when the domestic market is doing as well as it is today.
"In my opinion you can't properly diversify without international investments," says the Bal Harbour, Fla.-based Navarro. "At the end of the day we're in the business of trying to achieve capital gains for our clients. And we can't have blinders on when it comes to where to invest."
To reach the right mix of international exposure in a portfolio, Navarro practices what he preaches. The 300 households he advises usually hold about 20% to 25% international stocks in their portfolios. And he tells them that investing globally today, with the lower valuations to be found, is following half of the classic investing dogma: Buy low and sell high.
That's why he believes he needs to broach the subject with clients so that they understand the diversification moves he's making. To keep their interest engaged, their anxiety down and their minds focused in the right direction, Navarro produces his own research for clients, allowing him to steer the conversation to why he's buying international options rather than waiting for an anxious call from them first.
Indeed, advisors and other market observers say that proactive communication with clients is key. Gene Goldman, the head of research for Cetera's Financial Group, is working on an investor letter to assist his advisors in their discussions with clients.
"What we learned is you have to provide information to clients and advisors," Goldman says. "At the end of the day we help our advisors. We're saying, 'Yes. We're seeing the same thing.'"
Beyond Our Shores
The U.S. equity market is enjoying a strong run in recent years. Both the S&P 500 and the Dow Jones Industrial Average have more than doubled since their lows in March 2009. (The Dow increased 135% in that time while the S&P surged 150%.)
It's in that environment that many advisors find themselves encouraging clients to cut back on U.S. exposures and add back some international weight to their portfolios.
They understand the move may be confusing some clients are already uncomfortable with the small global exposure they currently have. And so even as advisors are looking for new global options, they're also trying to make sure clients understand the reasons behind these moves.
Jeff Korzenik understands all too well why some clients may be confused as to why their portfolios aren't more heavily weighted in domestic investments. But as the chief investment strategist for Fifth Third Private Bank, Korzenik views the last three years when the U.S. has held such a strong lead in its equity valuation as an historic exception.
Taking a slightly longer perspective, he says that since 1988, the U.S. has not been a top-performing country, based on returns he analyzed from 72 MSCI country indexes. Moreover, it as appeared in the top 10 only six times since then.
Historic anomaly or not, the recent strong performance resonates with investors when they look at domestic stock returns. "We're very sympathetic to clients," he says. "It's frustrating when the home team is doing so well and you have any part of your portfolio elsewhere."
But strategists and advisors say that weighting too heavily on home-grown picks is a bad decision, even in today's market and even if clients would prefer that move. Instead, they believe it's time to move clients into more international options so that they'll be well positioned when the global terrain turns around.
While some are eyeing frontier stocks opportunities in countries like Vietnam and parts of the Middle East where there is little transparency and high risk, but also a high potential for growth others are staying a bit more cautious. Many feel more comfortable turning to ETFs or purchasing opportunities in regions, such as Mexico and India, that are still considered emerging but have a bit more history in terms of research and accessibility.
No matter the region, the consensus is clear: Hunkering down and staying within one's own borders is playing too safe at this point. It's time to do some global shopping and help clients understand why.
Is China Still Golden?
Advisor Scott Armiger is starting to weight portfolios with more international options this year. Currently clients have about 10% in global opportunities, and Armiger, Christiana Trust's chief investment officer, is starting to move that closer to 15%, based on what he says is a positive second quarter in the European Union.
Emerging markets, however, look less attractive than more developed regions like Europe, says Armiger. Even in the best of times, he says, he only keeps a small allocation of his clients' funds there. He understands that investors are eager for growth, and specifically inflation-beating growth, but he doesn't want to make a big bet for them in any targeted area. And with his clients predominantly concerned about protecting their principal, he is cautious.
In particular, Armiger has concerns about China. Even though it surpassed Japan to become the second largest economy in the world, China is still viewed by many as an emerging market. The designation is less worrisome to Armiger than the fact that the country's growth has slowed down to just about 7.5% making it less attractive an option, at least for his clients.
"We're worried about China," says the Wilmington, Del.-based Armiger. "We're not sure it's that strong."
Jim Winslow, an advisor at United Bank & Trust in Ann Arbor, Mich., however, is eyeing China as an opportunity, particularly for longer-term investors. He says that while China may be settled in a period where its economy only shows growth of 7% to 8% and not the double digits investors had grown accustomed to in recent years that's still a healthy rate in his opinion.
Managing the portfolios of about 125 client relationships, Winslow has approximately 15% allocated today to international options, and he feels comfortable holding with that position for the next year or two. But as Winslow watches the European recession start to abate, and exports to that region pick up from emerging markets like China, he says he'll probably start increasing his clients' exposure to emerging markets in 2014.
Kings of the Wild Frontier
Tracie McMillion, asset allocation strategist at Wells Fargo Bank, is looking at opportunities in the frontier markets as she believes they can offer a unique allocation for investors beyond the emerging and developed arenas, while providing additional portfolio growth.
"Those are the most infantile markets," says McMillion, who's based in Winston-Salem, N.C. "They are the markets that are highly concentrated in one sector and one industry. And when investing in frontier markets there's an element of diversification you're not getting in international developed markets."
Jeffrey Saut, chief investment strategist at Raymond James, is also eyeing frontier and emerging markets for the firm's clients and says that for the first time in two to three years these regions are starting to look attractive on a valuation basis. But the firm tends to lean toward mutual funds to position investors, rather than invest in single stock picks.
"To do it right you need to spend time in Vietnam and Cambodia," says the St. Petersburg, Fla.-based Saut.
Cetera's Goldman follows that philosophy as well, relying on portfolio managers to select assets for the firm, particularly in regions where he believes the situation can change dramatically. Still, he'll consider how spread out analysts are and how big their purview is when choosing options.
"At the end of the day we're not going into Vietnam," he says. "We're letting the managers pick [options.]"
Goldman is steadfast in his opinion that Cetera's clients need to be globally diversified, particularly in emerging markets. The firm recommends that advisors hold clients' portfolios at 70% U.S., 20% developed and 10% emerging markets.
Still, he knows that advisors are occasionally fielding calls from investors who want to know why their international positions aren't doing as well, and is helping advisors explain the position to their clients.
"We're not saying this will last long," Goldman says about the lagging international markets. "Markets do go through a period where diversification doesn't seem to work out. But then they straighten themselves out."
SunTrust's Navarro is most interested in Europe where equities have struggled to regain traction after the region's long-term recession. To some, that move may appear like stepping blindly into a sea of trouble. But from Navarro's viewpoint, Europe offers a feast of opportunities which explains why he's starting to add equities from that region to his clients' portfolios (see our separate feature story on Europe.)
"Yes it's ugly still, but a little less ugly," he says. "We think Europe is where we were four years ago. The ideal time to buy [U.S.] stocks was on March 9, 2009 when AIG was in the toilet and Citibank was failing. But we feel it's their turn and we want to participate in their recovery."
It's A Global World After All
To be sure, not every bank advisor has convinced clients to increase global allocations to 20% or 25%.
Jim Wolf, an advisor at Eli Lilly Federal Credit Union, is one who can attest that old habits die hard. While some may hold as much as 25% in global allocations, his typical client is far lower than that at about 5%, he says, at least for now.
"It will eventually get back to 20% to 25% but it will take time," says the Indianapolis-based Wolf, who only started adding global options back toward the third and fourth quarter of 2012. "I truly think international has a better valuation right now when you look at the fundamentals. Unfortunately, when you look at what international is doing, many investors are gun-shy." (LPL Financial is the TPM for Eli Lilly.)
While Wolf understands that some clients may perceive a move too heavily into international options as less-than-optimal right now, he also knows that it's his job as a manager to discover opportunities that provide good valuations for his clients and in a measured manner. Conversations with the more than 100 households he manages are also part of that job describing why he's buying into the global market even as that playing field still looks volatile.
In Fred Greene's mind the best move is one that diversifies his clients but never with large positions in any one country. And that conversation around diversification is one he's had with investors for the past three years, he says, to help them feel comfortable about their investments, and confident in Greene's management.
The senior vice president and portfolio manager at Woodforest National Bank selects country-specific ETFs to build balance, eyeing Brazil, Japan and Mexico in small doses. If one position doesn't work out as well as others, that's still okay, given his allocations. (Raymond James in the TPM for Woodforest.)
"Even if one country completely train wrecks it doesn't have a huge effect," says the Woodlands, Texas-based Greene. "But it helps reduce volatility on the portfolio."
There are always clients, however, who are going to put their foot down no matter how much thought has gone into building a diversified portfolio by an advisor. While SunTrust's Navarro hopes clients will look at their investments with a less U.S.-centric, more global eye, so their assets are diversified enough to grow as they move to retirement, he knows ultimately it's their choice.
Navarro approaches his clients with "thorough financial planning," he says, but also considers himself a bit of an educator as well as a psychiatrist, trying to get to the underlying reasons for their reactions.
He recalls one investor who refused to add any emerging markets to his portfolio. He always tried to figure out why, but in the end is willing to position an investor's portfolios however they ultimately demand, deferring to their requests.
It may be against his inclination, but in the end, "it's their money and their retirement," he says.