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Fund Spy

The Bull Market Has Warped Your Global Stock Portfolio

The long bull market has made you wealthy, but it may have distorted your global stock allocation and increased your price risk.

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Unless you rebalance regularly, you now own more U.S. stocks, and they're more expensive. That's because U.S. stocks have gained almost 6 times as much as non-U.S. equities since the March 2009 bottom of the global financial crisis through Oct. 31, 2019, claiming more benchmark real estate and commanding higher valuations. The MSCI ACWI Index's helping of U.S. stocks has swelled to 55% from 41%. The gap between domestic and overseas valuations, though it has been wider at points in the past 10 years, still yawns. The S&P 500's trailing 12-month and forward price/earnings ratios are about one third higher than those of MSCI ACWI ex USA Index; its price/book values are more than twice the latter benchmark's.

Not all active global stock funds have chased the U.S. market. Most acknowledge that overseas companies offer more attractive valuations on average than their U.S. counterparts, and some have taken gains in the latter to redeploy in the former. The median active world stock fund's U.S. stake, however, still has increased to more than 50% from 42% in the past 10 years. Some world stock-pickers, however, have been more assiduous trimmers of U.S. stocks and buyers of non-U.S. shares. Here are some of the best ones.

Old-school value investing shop Tweedy, Browne has steadily decreased its U.S. exposure as the rally has ground on. Tweedy, Browne Worldwide High Dividend Yield Value (TBHDX), which has a Morningstar Analyst Rating of Bronze, had about 20% of its assets in U.S. stocks as of September 2019, and Bronze-rated Tweedy, Browne Global Value (TBGVX) had less than 12% in the U.S. In recent commentaries, the fund's management team has said, "Equity market valuations remain full-to-high, particularly in higher quality businesses and in U.S. equities." Tweedy, Browne Global Value has invested more in the more developed emerging markets, the managers wrote.

Silver-rated Causeway Global Value (CGVVX) had as much as half of its assets in U.S. stocks in 2015 but has since trimmed that to about 35%, as of September 2019. Causeway's managers noted in an August 2019 commentary that "U.S. stocks and the U.S. dollar have attracted global capital flows, pushing the U.S. equity market valuation premium relative to MSCI EAFE markets to a 20-year high." They're finding more opportunities among cyclical stocks, which they say have more than priced in a potential recession.

Silver-rated Oakmark Global (OAKGX) lets stock-picking drive its region and sector bets, and it has about half its assets in U.S. stocks. This concentrated fund's U.S. stake has ticked up this year owing to market appreciation, but earlier in the year the concentrated fund owned what its managers claimed was a record five emerging-markets stocks.

Similarly, Dodge & Cox Global Stock (DODWX) has about 46% in U.S. stocks, but its emerging-markets stake is about twice the 5.5% median for active world stock funds. In earlier commentaries, the fund's managers wrote that the spread between U.S. and non-U.S. stocks was historically high, which helps explain why the "portfolio is tilted toward international stocks and trades at a compelling 11.8 times forward earnings."

Value-oriented funds were not alone in downplaying the United States. Bronze-rated Artisan Global Equity (ARTHX) took its U.S. weighting down to as low as 42% at the end of 2018 from 64% in 2016. As of August 2019, its U.S. stake had crept back up to nearly 52%. Veteran Mark Yockey and comanagers Charles Hamker and Andrew Euretig are thematic growth investors, but they pay considerable attention to valuations. Management had reported earlier in the year that they had moved more money overseas because of concerns about U.S. companies undershooting growth expectations.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.