“Everything is expensive.” In 2017, this was a common phrase heard within the walls of GuideStone Capital Management, LLC® (“GSCM”), the investment adviser to GuideStone Funds®. Most major asset classes saw significant price appreciation over the course of the year as global financial markets benefited from ample liquidity, improving fundamentals and increasing optimism. As we enter 2018, these conditions are expected to drive markets even higher.
Despite the dramatic selloff that occurred in the early part of February, the strong performance of U.S. equity markets over the past eight years may lead some investors to question the need to diversify a portion of their equity portfolio into non-U.S. investments. No doubt, U.S.-only equity investors have been handsomely rewarded since the end of the financial crisis. From April 1, 2009, through December 31, 2017, the S&P 500® outperformed the MSCI EAFE — a proxy for global developed equity markets, excluding the U.S. and Canada — by over 140% on a cumulative basis. In 2017 alone, the S&P 500 hit all-time highs more than 60 times, accounting for nearly one quarter of all trading days during the year. Interestingly, diversification away from U.S. equities has actually hurt investors in recent years. Compared to the S&P 500, a 60% U.S. equity, 40% international equity split (represented by the S&P 500 and MSCI EAFE) underperformed by over 50% cumulatively between April 2009 and December 2017 — with nearly 7% higher volatility.
In a market environment where the need for diversification may seem fleeting, are there legitimate reasons for investors to consider a dedicated allocation to non-U.S. equities within their investment portfolios? GSCM thinks so.
According to David Spika, President of GSCM and Vice President and Global Investment Strategist of GuideStone®, “Foreign markets have not kept pace with U.S. markets over the past eight years, as the U.S. recovered more quickly from the financial crisis and the strength of the U.S. dollar muted returns in non-U.S. investments. Now, however, we are seeing stronger potential for economic growth outside the U.S. Foreign central banks are likely to remain accommodative for longer than the U.S. Federal Reserve, which should further boost growth in those markets. These factors, coupled with a weakening U.S. dollar, are positive indicators for nearer-term non-U.S. equity returns.”
Matt Peden, GSCM Chief Investment Officer, agrees. “Since the financial crisis, the economic and earnings cycles of non-U.S. markets have lagged the U.S. and are generally below their previous cycle highs. Because non-U.S. companies are earlier in their respective cycles compared to the U.S., investors may find non-U.S. investments increasingly appealing due to more attractive valuations and expanded growth potential.”
Investors who impose a U.S.-only geographic restriction on their portfolios gain exposure to less than half of the world’s total equity market capitalization. By expanding their portfolios to include non-U.S. equities, investors are provided access to a meaningfully larger opportunity set within an increasingly globalized world.
For investors looking to add non-U.S. exposure to their equity portfolio, the GuideStone International Equity Fund (“Fund”) may offer an appealing option. Launched in 2001, the Fund is actively managed using a multi-manager approach, providing access to institutional money managers with deep international investing experience. Like all GuideStone Funds, it employs a focused, Christian-based screen to exclude companies that are publicly recognized as being in the alcohol, tobacco, gambling, pornography and abortion industries. As of December 31, 2017, the Fund is the largest fund with a social screen in the Morningstar Foreign Large Blend category — nearly double the size of the next largest fund.
By adding the Fund to the equity sleeve of a portfolio, investors can broaden the market sectors to which they have exposure and realize enhanced levels of diversification, both to U.S. equities and to other international equity funds.
The U.S. dollar declined unexpectedly in 2017 in response to mounting geopolitical pressures. If the dollar continues to weaken in 2018, the returns of dollar-based assets such as U.S. equity funds are likely to be affected. Consider Figure 1 below, which compares the cumulative returns of the S&P 500 and MSCI EAFE during recent periods of dollar strength and weakness. When the dollar appreciates, U.S. equities have historically performed better — significantly better — than their non-U.S. counterparts. The historical trend reverses, however, when the dollar depreciates.
||U.S. Dollar Index
|April 1, 1995–February 28, 2002
|March 1, 2002–March 31, 2008
|April 1, 2008–December 31, 2016
Source: Real Trade Weighted U.S. Dollar Index: Broad — FRED Economic Data; S&P 500, MSCI EAFE — Zephyr StyleADVISOR. You cannot invest directly into an index. Past performance does not guarantee future results.
The Fund is strategically managed with a philosophical focus on intentional risk — emphasizing the risks GSCM believes can be identified and are likely to reward investors over longer-term time horizons, while de-emphasizing the risks GSCM believes are unlikely to reward investors.
The Fund’s primary non-U.S. developed market holdings are complemented with targeted exposures to emerging markets, which have typically ranged up to 10% of the Fund's holdings. This flexibility in the Fund’s mandate allows it to pursue additional growth opportunities compared to other MSCI EAFE-benchmarked funds while avoiding the full risk profile of a true emerging markets fund.
GSCM uses a proven process of disciplined qualitative assessments, backed by robust quantitative analytics, to identify what it believes to be best in class sub-advisers and optimally allocate Fund assets among them. The Fund currently has five sub-advisers, blending growth and value investment styles across a wide range of countries, industries and sectors. This style diversity allows GSCM to make proactive portfolio shifts in anticipation of, or in response to, changing market conditions. In 2017, for example, GSCM reallocated a portion of Fund assets from growth to value in an effort to lock in portfolio gains while preparing for a potential future “risk-off” market environment defined by higher levels of volatility.
In addition to growth and value investment styles, the Fund employs a dedicated 130/30 Long/Short Equity strategy. This core strategy has a targeted allocation of 20% of Fund assets that, when combined with the Fund’s traditional long-only investment managers, gives investors added diversification and return potential.
Figure 2 illustrates the Fund’s current breakdown of sub-advisers, grouped by investment style.
Actual sub-adviser weights as of December 31, 2017
The GuideStone International Equity Fund is thoughtfully constructed to help investors capitalize on opportunities in non-U.S. equity markets while adding value relative to the MSCI EAFE. The Fund’s actively managed sub-advisers have tactical flexibility to pursue a broad range of high conviction investment ideas across the globe. And while it has the ability to make investments in emerging markets, the Fund’s core structure and mandate ensure that the majority of assets are allocated to international developed markets — positioning the Fund as a compelling option in the core international equity space.
Visit GuideStoneFunds.com/International to learn more about the GuideStone International Equity Fund.
You should carefully consider the investment objectives, risks, charges and expenses of the GuideStone Funds before investing. A prospectus with this and other information about the Funds may be obtained by calling 1-888-GS-FUNDS (1-888-473-8637) or downloading one at GuideStoneInvestments.com/funds. It should be read carefully before investing.
The Fund invests in foreign and emerging market securities which involve certain risks such as currency volatility, political and social instability and reduced market liquidity. To the extent that the investment advisor misjudges current market conditions, the Fund's volatility may be amplified by its use of short sales and derivatives, and by its ability to select sub-advisers to allocate assets. Short sales by a fund theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Leverage may increase the risk of loss and cause fluctuations in the market value of the Fund's portfolio to have disproportionately large effects or cause the NAV of the Fund generally to decline faster than it would otherwise.
Past performance is no guarantee of future results. There can be no guarantee that any strategy (risk management or otherwise) will be successful. All investing involves risk, including potential loss of principal. Diversification does not ensure a profit or protect against a loss.
All indices are unmanaged and not available for direct investment. Index performance assumes no taxes, transaction costs, fees or expenses. This update is prepared for general information only, and it is not to be reproduced.
The funds or securities referred to herein are not sponsored, endorsed or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities or any index on which such funds or securities are based. The Prospectus contains a more detailed description of the limited relationship MSCI has with GuideStone Funds and any related funds.
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This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. The information contained in this presentation is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client. This presentation makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives. This presentation is for general information purposes only. This information does not represent any GuideStone product.
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