Portfolio Construction Insights

The Pillars of International Equity

Executive Summary

With evidence now suggesting that international stocks could be poised for long-term relative outperformance versus U.S. equities, it may be time for advisors to take a closer look at their international stock exposure. Our research found that (1) many advisor models are underweight international equities; (2) advisors typically do not broadly diversify their international equity allocations; and (3) diversifying international equity allocations across developed and emerging markets, different investment style such as growth and value, and market capitalization has historically improved returns as well as consistency.

U.S. stocks have outpaced international developed markets, but the cycle may be shifting.

U.S. equities have outperformed international developed markets stocks since the 2008-2009 global financial crisis, driven in part by the U.S.’s rapid resort to aggressive monetary easing that enabled an earlier economic recovery. As the U.S. economic cycle ages and the Federal Reserve gradually normalizes monetary policy, relative performance could be poised for a change.

Rolling Three-Year Returns: The performance difference between International (MSCI EAFE Index) and U.S. (S&P 500 Index)

January 1, 1970 - March 31, 2019

Rolling Three-Year Returns

Past performance cannot guarantee future results.
Shading represents full market cycle from peak to trough.
Sources: FactSet, MSCI, S&P, and T. Rowe Price.

Developed markets outside the U.S. are earlier in the growth cycle, with longer runways.

International developed countries are earlier in the economic cycle than the U.S. and benefit from still-supportive monetary policies. Europe and Japan should benefit as global growth drives a pickup in trade, although rising trade tensions pose a risk. Equity valuations outside the U.S. are relatively attractive and have room to improve.

Purchasing Managers Index (PMI) Levels, 0-100

As of March 31, 2019

PMI Levels

Sources: Institute for Supply Management, FactSet, IHS Markit, Nikkei/IHS Markit, and China National Bureau of Statistics/Haver.

Many advisors are not fully diversified.

93% of advisors allocate a portion of their models to international equites but the majority are not diversifying by style and market capitalization. T. Rowe Price believes a well balanced portfolio utilizes value, core, and growth investment styles as well as a dedicated portion to emerging markets and foreign small and mid caps.

International Equity Usage in Moderate Risk Models

As of March 31, 2019

International Equity Usage in Moderate Risk Models

Sources: T. Rowe Price USIS-IPG proprietary Client Investment Platform (CIP) database

The Portfolio Construction Group attempts to align the model portfolio with the most similar Morningstar Target Risk index, which determines the corresponding risk model classification assigned to the model. The benchmark alignment and corresponding risk-model assignment is determined based on the model’s underlying allocations and the historical risk/return behavior of the model portfolio. Models that align closest with the Morningstar Moderate Target Risk index are classified as Moderate Risk Models. These models typically have between 50% and 70% of the model allocated to equity.

Asset allocation decisions can have a quantifiable impact on investment portfolios.

Applying the same principles often used in U.S. equity allocations, diversification across international investment styles and market capitalizations offer the potential for better risk-adjusted returns. Emerging markets stocks, for example, are a unique opportunity set and could be viewed as a key component of a broader international equity allocation.

The Impact of Diversification

Trailing 20-Year Returns from April 1, 1999 to March 31, 2019

The Impact of Diversification

Percentages may not equal 100% due to rounding.

Sources: Morningstar Direct. Analysis by T. Rowe Price

Diversification cannot assure a profit or protect against loss in a declining market. Performance does not reflect the expenses associated with the active management of an actual portfolio. Illustration assumes reinvestment of income and no transaction costs or taxes.

Category average performance is calculated net of fees and the underlying allocations are rebalanced monthly. Dividends and capital gains distributions are reinvested monthly. The performance shown is hypothetical and for illustrative purposes only and does not represent the performance of a specific investment product. For illustrative purposes.

See important disclosure below for definitions.

Important Information

Download a prospectus.

Copyright © 2019 FactSet Research Systems Inc. All rights reserved.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

Copyright © 2019, S&P Global Market Intelligence (and its affiliates, as applicable). Reproduction of S&P Dow Jones Indicies in any form is prohibited except with the prior written permission of S&P Global Market Intelligence (“S&P”). None of S&P, its affiliates or their suppliers guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions, regardless of the cause or for the results obtained from the use of such information. In no event shall S&P, its affiliates or any of their suppliers be liable for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of S&P information.

T. Rowe Price USIS-IPG proprietary Client Investment Platform (CIP) database

Copyright ©2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Batting Average: The number of months where the portfolio beat the index, MSCI EAFE

Sharpe Ratio: Is an investment measurement that is used to calculate the average return beyond the risk free rate of volatility per unit.

Standard Deviation: Indicates the volatility of a portfolio's total returns as measured against its mean performance.

Tap to dismiss

Manage Subscriptions

Unsubscribe All

Manage your watched Funds and Insights subscriptions here.


Change Details

Congratulations! You are now registered.

Begin watching and receiving email updates for:


Sign in to manage your subscriptions and watch list.



Latest Date Range
Download Cancel

This content is restricted for Institutional Investors use only. We were not able to validate your status as an Institutional Investor with the information you provided at registration.

Please contact the T. Rowe Price Team with questions or to revise your status.


You will need to accept the Terms & Conditions again.


You have updated your email address.

An activation email has been sent to your new email address from T. Rowe Price.

Please click on the activation link in order to receive email updates.


You have an existing account

Click OK to view your subscriptions and watch list.


Confirm Cancel