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International Diversification: Why It Still Makes Sense

by Bernard R. Horn Jr.

International Diversification: Why It Still Makes Sense Splash image

In November 1983, I wrote an article for the AAII Journal about the benefits of international diversification. At that time, very few investors even considered international diversification as an investment option. In almost 30 years since that article was written the world has changed.

In 1983 there were about 23 developed investable markets; in 2010 there are nearly 100! Countries that were not part of the market economy (particularly Russia and China) are not only market economies, but are arguably drivers of the fortunes of many companies worldwide. Yet, during times of crisis, the benefits of global diversification are called into question. Thi

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Bernard R. Horn Jr. is president and portfolio manager of Polaris Capital Management, LLC, a Boston-based global and international value equity firm that manages approximately $3 billion in four U.S-domiciled mutual funds, non-U.S. pooled funds, pension plans, endowment funds and institutional and individual accounts (www.polariscapital.com).


Discussion

Stephen from California posted over 3 years ago:

Great material! How can SI Pro expand to address emerging markets?


Paul from Oklahoma posted over 3 years ago:

Correlation isn't an underlying physical constant to be observed, measured and relied upon. It's a characteristic reflecting underlying market attributes. To the extent that investors view factors such as Europe's common currency problems, U.S. structural deficits and China's efforts to curb inflation as differentiating characteristics then correlation among markets will be lower. Free trade, converging regulatory and tax regimens and coordinated currency actions are examples of what may lead investors to view markets as constituting a unity, thereby driving correlations higher. Early on the author acknowledges the growth of investable markets from 23 to nearly 100, which itself is a symptom of growing uniformity of economic conditions throughout the world. Future correlations or lack thereof among markets will be a reflection of how investors view the world in terms of converging or diverging economic, tax, regulatory, legal and monetary conditions. It would be interesting to see exactly why correlations rise to such extremes during crisis conditions as described in this article and whether there are investment strategies that could be devised to anticipate and exploit those causative factors.


Thomas from California posted over 2 years ago:

More than just the number of investable countries has happened since 1983. What role does significantly increased globalization play in the apparent increase in correlations between developed and developing markets?


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