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Day 4 | A “Lost Decade” for International Equities
12 Days of Christmas: Themes to Know for 2017

When implementing any type of “tactical” or “dynamic” strategy, much of the attention is placed on what positions are bought/owned. However, it is often equally (if not more) important to take note of what you don’t own. Said another way, the key to outperformance over time is not only participating in up trends, but also managing your downside risk. Relative Strength is designed specifically to accomplish these two goals. It both attracts sustainable leadership to the portfolio, while forcing you out of laggard areas. Perhaps, one of the most important trends to have avoided over the last decade was exposure, and certainly an overweight, to the International Equity asset class. Looking at the long term trend chart of the SPDR MSCI ACWI ex-US ETF CWI (which encompasses both the emerging and developed international landscape, ex-US) from 12/31/2006 – 12/14/2016, we can visualize that it has without a doubt been a “lost decade” within the asset class. In fact, notice that the CWI, as well as the Emerging Market-specific VWO and Developed Market-specific EFA, have actually provided losses to any buy and hold investors over that time. Meanwhile, each of the other five macro asset classes (including cash) have been able to offer gains to varying degrees. As a result, it is fair to assume that portfolios which have had a consistent allocation to international equities over the last 10 years, have likely seen a drag on performance.

When we look at how our indicators may have helped navigate the past decade with respect to this asset class, consider the following bullet points:

  • International Equities only sat in the #1 spot of 401k Control 21% of the time between 12/31/2006 – 12/14/2016. Furthermore, the time spent at #1 occurred during relatively short-lived bright spots of outperformance from the asset class.
  • Specifically, while in the #1 spot from 12/31/2006 – 1/8/2008, the VWO rallied 32.23%, EFA was up 4.10%, and CWI gained 8.78%. The only other asset class to keep pace with those returns during that period were Commodities, as the UV/Y was up 23.86%.
  • The rest of the time International Equities spent at the top of 401k Control occurred between 4/9/2009 – 5/4/2010. VWO rallied 51.59%, EFA was up 30.56%, and CWI gained 37.48%. The only other asset class to keep pace with those returns were US equities, with the SPX up 37.01%.
  • In addition to DALI, many may also look to the “Asset Class Group Scores” page for asset allocation guidance. Over the last decade, the average group score for the “Non-US” group has been below 3 more than half the time (53.56%). It has been above the 4-threshold, which designates the ideal “buyable” range, just 15% of the time.

Lost Decade

While we make every effort to be free of errors in this report, it contains data obtained from other sources. We believe these sources to be reliable, but we cannot guarantee their accuracy

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