Investment recommendation: Neutrality to U.S., slight overweight to international

Posted by Wade Balliet
Investment Strategy

At Bank of the West, our Investment Advisory & Management team (IA&M) currently believes that Bank of the West clients should consider revisiting their equity allocation and, if appropriate, look to rotate toward neutrality to U.S. holdings and a slight overweight to international asset classes

closeup on a pen (in human hand) tracing a pie graph on an investment statement.Further, we believe clients could explore the use of a diversified mix of international asset classes to round out equity portfolios. This is, in part, due to a global growth forecast of 3.7% by the International Monetary Fund (IMF), which is set to outpace U.S. growth this year. As you can probably tell, the IMF is predicting that many international markets may grow faster, but are also further back in the recovery than the U.S., which means future growth potential of economies and earnings could drive higher equity returns for globally diversified investors.

Realizing better risk-adjusted returns

While our allocation recommendations are based on 2014 economic projections, there is evidence to suggest that investors could utilize global diversification as an investment strategy.

In a global economy, an event in one region can create diverse economic reactions and trends that do not correlate across all regions. This is why global assets can serve to increase returns and reduce risk across various economic environments. In fact, when compared to a domestic-only strategy, a portfolio with global holdings can , over time, earn a higher return for the same level of risk and/or produce less risk for the same level of return.

For example, since 2000, more than half of global GDP growth was driven by emerging markets, led by Brazil, China, India, and Russia, called the BRIC economies, which produced double-digit growth rates. Investors who were positioned in these emerging counties — as well as other countries — were rewarded over those who were exclusively in U.S. equities or only invested in advanced countries.

Further, in a Gerstein Fisher study, a globally diversified portfolio outperformed a U.S.-only portfolio in 96% of rolling three-year periods, with a total outperformance of 35 percentage points from 2001 to 2011.

Although past performance does not guarantee future results, this suggests that investors should assess their diversification strategies and, where appropriate, adjust their allocations to help to achieve a more optimal level of non-domiciled holdings, while looking for investments that will provide low correlations with their domestic holdings.

Aligning portfolio allocation with market capitalization

Currently, U.S. equities comprise approximately 49% of the global market, so investors may consider having 49% of their portfolio in U.S. equities and 51% in non-U.S. equities. However, looking at short-term performance in the past decade, there are periods of time where allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 85% of the maximum possible benefit. Again, past performance does not guarantee future results.

Despite the evidence supporting global diversification, studies show that few investors would be comfortable with having 51% of their portfolios invested in non-U.S. equities due to a range of factors, often described as a “home bias.”

For example, according to a 2014 report from Vanguard titled “Global Equities: Balancing Home Bias and Diversification,” U.S. investors maintained an allocation to U.S. stocks that was approximately 1.7x the market cap of U.S. stocks. This suggests a significant overweight in U.S. assets as well as an opportunity to evaluate the potential to add global assets to a portfolio as a core investment strategy.

The opinions and recommendations presented are the views of the Investment Management and Trust Division of the Bank of the West Wealth Management Group. All investments involve risk. Investors should seek the advice of a financial professional regarding the appropriateness of any securities or strategies discussed. Foreign securities, involve additional risks including exchange rate fluctuations, social and political instability, less liquidity, greater volatility and less regulation.

Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Past performance is no guarantee of future results.

How much do FICO scores matter for loan eligibility?

Mortgage Banking

The average FICO score of closed mortgage loans in June was 728, down from an average of 742 a year ago, according to the latest Origination Insight Report from mortgage software company Ellie Mae.

Middle-aged man holding a sheet of paper and looking at an open laptop.One thing I like to remind people is your credit score alone does not determine mortgage loan qualifications. Too often people look at data on credit scores and feel their score may be too low to seek a mortgage. Don’t let credit score information prevent you from seeking a mortgage.

Mortgages are available for people with credit scores in the 600s even with as little as 3.5% to 5% down. In fact, almost a third of closed loans in June had an average FICO score of less than 700, according to Ellie Mae. And closed FHA Loans for purchases, with an average loan-to-value of 95% (meaning buyers are putting down just 5%), had an average FICO in June of 683, according to Ellie Mae.

For homebuyers with credit scores lower than average, I’m seeing home loans being made provided the borrowers have: (1) the ability to repay based on income and their total debt levels, and (2) a positive payment history that shows they?ve managed credit responsibly.

A lower-than-average credit score does mean that you may have a higher interest rate on the loan than you would have if you had a higher credit score. All things being equal, if you have a credit score in the 600s versus the upper 700s, your interest rate will likely be higher — but financing may still be available.

A good way to start the process of getting a mortgage and a home is to check your credit report and credit score. You can get your report and score from a number of online sites, including freecreditreport.com and CreditKarma. You are entitled to a free copy of your report each year, but you may have to pay on some sites to see your actual credit score.

It is a good practice to know and monitor your credit report and your score, even if you’re not in the market for a home loan. Just remember, your credit score is just one component of the review that goes into determining your eligibility for a loan and the terms of a possible loan.