I was on the phone yesterday with a client. “Why do I need to own international stocks,” he asked. “I already own big U.S. companies and they do plenty of business overseas. Isn’t that enough?”
Libbra acknowledges that many large U.S. companies do plenty of business overseas. Some, like McDonald’s, can derive almost 70% of their revenues from foreign sales. Others, like Home Depot, do scarcely over 10%.
In Libbra’s research, over half the large U.S. companies studied derived more than half their revenues from foreign sales. That’s a significant portion.
But here’s the clincher. Does that make the stocks – and the stock prices – behave more like U.S. stocks or more like foreign stocks? Meaning, does owning a U.S. company with plenty of foreign sales help you diversify your portfolio and lower overall risk, or not?
The short answer, according to Libbra‘s research, is that investing in U.S. multinationals does NOT provide international diversification.
“Holding large U.S. MNCs (multinational companies) provides little international equity exposure from an investment return standpoint,” he concludes. “It is clear that high percentages of foreign sales do not result in higher international exposure for investors. No matter the level of revenue derived from foreign sales, large U.S. MNC stock prices are more correlated with the overall U.S. markets than with international markets.”
So what does all this mean for the U.S. investor? We already know that you can improve your portfolio results over the longer-term by diversifying and including some international stocks and bonds in your portfolio mix. That helps to lower portfolio risk and can enhance returns.
But just owning U.S. companies that do a lot of business overseas won’t cut it. You need a dedicated international allocation, says Libbra, to truly obtain the benefits of global diversification.