Debunking International Investing ‘Truisms’

Popular advice on how to invest in international equity markets is often mistaken, says Parametric’s Paul Bouchey.

Forget everything you’ve been told about international investing.

In a new paper, Parametric CIO Paul Bouchey argued that much of the common advice given on how to invest in international equity markets is best ignored.

“I’ve reached my personal limit on the illogical things I’ve heard which are repeatedly passed off as truisms for investing in international markets,” he wrote.

For one, Bouchey said asset managers by no means need “boots on the ground” to invest globally. Though he makes an exception for private equity deals, infrastructure projects, and private real estate investments—all of which require “focused local knowledge”—traveling for the sake of public equities is “costly and unnecessary.”

“The vision of a manager traveling to exotic locales, visiting factories with a hard hat on, and finding opportunities that other analysts have overlooked is a fallacy,” Bouchey argued. “With over 70 liquid equity markets in the world, you would need a lot of boots on the ground to realize this romanticized vision.”

Understanding a country’s politics, media, and macro-economic situation is also overrated, according to Bouchey.

“For an equity investor, any type of market timing is more likely to increase trading costs and risk, not returns,” he explained.

The Parametric CIO also dismissed the idea that investors should always avoid “low-quality companies” such as state-owned enterprises (SOEs), because these stocks are usually cheap and the firms themselves often enjoy monopoly powers and government backing.

“It’s not immediately obvious that SOEs are bad companies that are destined to have bad returns in the future,” he wrote.

Finally, Bouchey said there is no need for investors to maintain high active shares in individual stocks. The extra concentration, rather than increasing the odds of outperformance, only adds risk, he said. The best approach, he argued, is broad diversification—investing in every country, in every sector, across thousands of stocks.

“The fact is that global equity markets are largely efficient,” Bouchey concluded. “Spending lots of money on top-down or bottom-up analysis is not helpful.”

Related: A CIO’s Guide to Two Weeks in China

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