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Categories
Global Equities
Is flexibility the new diversification in international equity investing?
Sunder Ramkumar
Quantitative Analyst
Michelle Watts
Solutions Portfolio Manager
Vincent Fu
Client Analytics Specialist

Diversification is no longer what it used to be when it comes to investing in international equities. Global equity correlations have increased significantly following greater trade and market linkages between countries, eroding the traditional diversification benefits of investing in this asset class.


We find that the main benefit of international equity investing is in broadening the opportunity set, and skillful managers with greater flexibility to pursue cross-border investments can generate superior long-term results.


Bar chart reflects total return of regional equity mutual funds sorted by geographic flexibility from 1998–2017. U.S. equity funds with more flexibility to invest outside the United States outperformed those funds with less flexibility by 0.7%. For those ranked in Morningstar’s top quartile,  U.S. equity funds with more flexibility to invest outside the United States outperformed those funds with less flexibility by 1.5%.  For non-U.S. equity funds, those with more flexibility to invest in emerging markets outperformed those funds with less flexibility to invest in emerging markets by 1.4%. For those ranked in Morningstar’s top quartile, non-U.S. equity funds with more flexibility to invest in emerging markets outperformed those funds with less flexibility by 2.6%.  Sources: Authors’ calculations and Morningstar. ©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.

Our research published in The Journal of Portfolio Management yields several ideas for plan sponsors and investors to consider, including:

  • Continue to allocate to international equities. International companies make up a significant part of the global opportunity set, and most plans are still underallocated.
  • As distinctions across domicile diminish, take a flexible approach to international equity investing. Rather than specifying rigid boundaries between U.S. and international companies, plans should consider including a corridor of permissible allocations in response to changing market opportunities.
  • Plan sponsors may seek to adapt allocations across regionally focused funds and can also benefit from delegating more bottom-up flexibility to existing managers. For instance, U.S.-oriented mandates may be permitted greater latitude to partly invest in international equities, and international equity mandates should be allowed to vary the proportion of emerging markets investments.

We believe capital markets and economies have evolved and become more integrated, making the rigidity of distinct equity silos less relevant today. So, it is perhaps time for investment policy to evolve in the area of international equity, this time incorporating more flexibility.



Sunder Ramkumar is a quantitative analyst with 18 years of industry experience (as-of 12/31/2021). He holds a master’s degree in management science and engineering from Stanford University.

Michelle J. Black is a solutions portfolio manager with 27 years of investment industry experience (as of 12/31/2021). She holds a bachelor’s degree in business administration, finance from the University of Southern California.

Vincent Fu is a senior client analytics specialist with 15 years of experience. He holds an MBA from NYU and a bachelor's from UCLA. He also is a CFA charterholder. 


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