This case deals with a matter that all international investors deal with. When a client decides to invest internationally, they run the risk of not only the investment losing value, but also the currency losing value. In the case of Sandra Meyer, it was not about just convincing a client about investing internationally; she had to convince her largest client’s Chief Investment Officer, Henry Bosse. The three (3) main topics Sandra was focusing on were international diversification benefits, currency fluctuations and the possible benefits, and pros and cons regarding the global equity markets and the various correlations.
She knew that if she could fully explain those topics, she would be able to convince Bosse to follow through with the international investments. Sandra’s company, CapGlobal, is comprised of herself and six (6) other international investors. CapGlobal served a small number of large institutions by managing their portfolios regarding international allocations. Their methodology was focused on the quantitative models and research in international markets. Normally, CapGlobal gathers data from markets around the world at an individual country level, but for the case of Bosse, they Sandra decided to gather information on both regional and individual country levels.
She therefore decided to analyze the performance of international and U.S. equities from 1991 to 2013 and also for shorter periods within that period (1991-2001 and 2002-2013). Included in the analysis are Australia, Canada, China, Germany, India, Japan, and the United Kingdom as well as the U.S. First monthly return were calculated for each market, and then the average monthly return was calculated. To simplify the understanding of the analysis, Sandra converted all foreign currency to USD using specific prices for that time period. Sandra then compiled a list of all monthly currency exchanges of the foreign currency to USD. Sandra wanted to show, year by year, what portion of international market returns was accounted for by equity performance and what portion resulted from currency movements.
The main factor many of CapGlobal clients are concerned about is performance of international stocks relative to U.S. stocks. With that in mind, Sandra analyze the historical data on the performance of a domestic index, the S&P 500, and two international indices, Morgan Stanley Capital Inc.’s Europe, Australasia, and Far East (EAFE) index; and Morgan Stanley Capital Inc.’s Emerging Market (EM) Index. Wanting to take her analysis further, Sandra demonstrated how local equity returns and currency movements each contributed to the returns to U.S. investors. To do so, Sandra calculated the return on foreign equities relative to the S&P 500, using the native currency-based EAFE and EM indices and the S&P 500. The final step in the analysis was to compile all the data into a risk-return framework. This was done to show how international diversification enhanced the returns that were possible for a domestic investor.
In other words, to show what the benefits were and how it could cause the results to fluctuate. Sandra used the monthly index values for the S&P 500 and the EAFE indices to calculate the monthly returns of both. The client presentation that Sandra would give to Bosse and possibly other future clients would consist: The annualized returns for the equity markets of Australia, Canada, China, Germany, India, Japan, the United Kingdom, and the U.S. from 1991-2013 (1991-2001 and 2002-2013), using both country currency returns and USD converted returns.
The correlations for different markets over the entire period plus sub-periods using first the returns data with local currencies and then USD converted data. The annual performance of foreign equities by the EAFE and EM indices comparative to U.S. equities by the S&P 500 index from 1991-2013 and the breakdown of said performance into local equity returns and currency returns. The returns of a series of portfolios based on different mixes of foreign and U.S. equities, using the returns on the S&P 500 and EAFE indices (both original country currency and USD converted) to construct these portfolios.
My recommendations for Sandra begin with how she will present this information. She needs to understand that, currently, her client is hesitant in investing internationally, and she needs to reinforce the idea that she is using their money and will be supportive with any decision they select. This allows the client to have a sense of comfort and importance when they are listening to the presentation. If the client is not comfortable, they will not likely follow through with the presentation no matter how accurate and promising the information portrayed is. After Sandra effectively conveys her understanding about using the client’s money to invest internationally, I feel she should immediately continue the presentation by explaining her data set time period and the various markets and countries used to collect said data. I would suggest that she use the planned set from 1991 to 2013 with the subdivision as planned.
Now some might think that including so many years before the market crash of 2009 is unnecessary, but, to the contrary, it shows how the US market and the USD always bounce back after an economic crisis. Sandra’s extensive research in the listed foreign markets (Australia, Canada, China, Germany, India, Japan, and the U.K.) provides ample countries for the client to see how the U.S. compares. In addition, by selecting the three of the largest markets available (S&P 500, EAFE and EM) Sandra is providing more than enough information for the client to understand how global markets correlate between each other. Subsequent to explain the data set, I feel Sandra should explain the differences between the foreign currencies, and how the presentation will convert most of the data to USD for the sake of the client better understanding the presentation.
This is important because the client will not be investing in the foreign currency, they will be investing in USD. Once the client understanding that, Sandra should go into detail how the USD compares to foreign countries over the time period she selected in an annual basis. This will show trends in how the USD has changed over the years. It should also be noted that the information Sandra compiled regarding Monthly difference is a valuable asset and should be provided to the client as additional information, but for sake of the presentation, I feel Sandra should only use the annualized data sets, considering too many figures could confuse and deter the client. The next main point that Sandra needs to make is the annual indexes of international markets. This is what will show the client that the foreign countries are worth investing. Again, by focusing on annualized data, Sandra can clearly show the countries that are providing best gains for the sake of investing (Exhibit 2).
At this point Sandra could explain how even though the U.S. might have a stronger currency and market, there are still aspects where foreign countries might be better. An example of this could be how even though China has a weaker currency and market, the fact that they provide 19.7% of the U.S. imports means they are of value, and could show potential market growth in the future. (International Trade Center. 2014) This is just to explain why specific countries are included in the data set when they are obviously not as strong as the U.S. and how even though they might have aspects that are valuable to the U.S. there are still risks that come with investing in those smaller countries. Once the client understands all the information portrayed by the analysis, I feel Sandra should begin providing the client examples of how they could have profited if they invested internationally in previous years.
An example could be showed of how much the Australian market and currency has been increasing. If someone was to invest in iron ores & concentrates from Australia in 2009 at the start of the economic climb back, that person would be experiencing approximately 42.96% return on investments thanks to their significant market increases. That figure does not reflect the increase in currency revenue as well. In those five years, the AUD, when compared to the USD, decreased approximately 19.08%. This means that coupled with the 42.96% from the market and 19.08% form the currency, the investor would have gained a total of 62.04% on their initial investment.
International Trade Center. 2014. Top US Imports (Top US Imports). http://www.worldsrichestcountries.com/top_us_imports.html. Retrieved 25 January 2015. Mihir A. Desai, Kathleen Luchs, Elizabeth A. Meyer, and Mark F. Veblen. March 02, 2004, Innocents Abroad: Currencies and International Stock Returns. Harvard Business Review. https://hbr.org/product/innocents-abroad-currencies-and-international-stock-returns/204141-PDF-ENG. Retrieved 25 January 2015. Exhibits