Is it time to look beyond the U.S.? | Buffalo Funds
For a long time, investing outside the U.S. has required patience.
Over the last decade, that patience hasn’t always been rewarded. U.S. equities, particularly large-cap growth stocks, have been the clear winners. The strength of American businesses in areas such as technology and artificial intelligence has been impressive, and there are plenty of good reasons investors have continued to favor the U.S.
But when one market works this well for this long, it’s worth asking what might we be missing by continuing to look in the same place?
We think international equities deserve another look.
This isn’t a call to move away from U.S. stocks. The U.S. is home to many of the world’s best businesses, and we expect that to remain true. After such a long period of U.S. market leadership, we think investors should at least consider whether the next dollar of equity exposure needs to come from the same place.
One consequence of the U.S. market’s strong performance is how concentrated many portfolios have become. An investor may own several mutual funds or ETFs and still have significant exposure to the same handful of large companies. That hasn’t necessarily been a bad thing. Those companies have driven meaningful market returns. But adding another U.S. equity investment may not provide as much diversification as it appears to on the surface.
That is where looking internationally can be useful.
There are thousands of companies outside the U.S. operating in markets and industries that look different from what investors see at home. Some are leaders in semiconductor equipment, industrial automation and healthcare. Others have built strong positions in consumer, financial and luxury goods markets.
Many are also benefiting from the same long-term trends investors are watching here domestically. Automation doesn’t stop at the border. Neither does electrification, healthcare innovation or the continued digitization of the global economy.
Valuation is another reason we think the conversation around international equities is worth revisiting.
International markets have generally traded at a discount to the U.S. for years. That discount, by itself, isn’t enough to make an investment attractive. Cheap companies can stay cheap, and we wouldn’t want to own a business simply because it has a low P/E ratio.
For us, the more interesting question is what you’re paying for the growth you’re getting.
There are high-quality businesses outside the U.S. with attractive long-term growth opportunities that don’t necessarily carry the same valuation premium as comparable U.S. companies. In some cases, that creates an interesting combination: a strong business, a compelling growth opportunity and a more reasonable starting valuation.
That’s a different proposition than simply buying something because it looks inexpensive.
We also don’t think the international conversation needs to be about choosing between the U.S. and the rest of the world. It can simply be about adding another dimension to an existing portfolio.
If an investor already has a significant allocation to U.S. equities, international stocks can provide exposure to different companies, industries, economic conditions and market cycles. More importantly, they can provide access to businesses investors may never encounter in a U.S.-only portfolio.
It’s also worth remembering that the next ten years probably won’t look exactly like the last ten. Markets move in cycles. Leadership changes. Valuations change. Investor expectations change. The companies and markets receiving the most attention today may not be the ones creating the most compelling opportunities several years from now.
None of that means investors should make a dramatic shift away from the U.S. We simply think that after a decade of exceptional U.S. market leadership, it may be time to widen the lens.
The U.S. remains an important part of the global investment landscape. But it isn’t the entire landscape.
Great businesses exist all over the world. We think it’s worth making sure we are looking for them.
For those interested in exploring international investing, we invite you to learn more about the Buffalo International Fund.
Before you invest in the Buffalo Funds, please refer to the prospectus for important information about the investment company, including investment objectives, risks, charges, and expenses. You may also obtain a hard copy of the prospectus by calling (800) 492-8332. The prospectus should be read carefully before you invest or send money.
Mutual fund investing involves risk; principal loss is possible. Diversification cannot assure a profit or protect against loss in a down market.
Kornitzer Capital Management is the adviser to the Buffalo Funds, which are distributed by Quasar Distributors, LLC.
