The Missing Piece of the Equity Puzzle


Kelly Johnson



Consider international growth stocks to solve your investment puzzle

With the current bull market now over a decade old and the S&P 500 Index having more than quadrupled in value since the Great Recession, many U.S. equity investors likely have been pleased with the results. The U.S. bull market has been led mainly by growth stocks. However, it’s been different abroad. The MSCI EAFE Index and the Morningstar foreign large blend category have lagged the S&P 500’s gains considerably. This is due to their larger allocation to sectors that are traditionally comprised of value, not growth, stocks.1 For example, as seen in the table below, almost a fifth of this international equity category is allocated to financial services, a sector that sits squarely in the “value” equity style box. Meanwhile, almost 23% of the S&P 500 is allocated to technology, its largest sector.

A Key Piece of International Equity

Despite the value slant of foreign large blend funds, there are many international growth stocks that, like their brethren in the U.S., have been performing very well. In fact, as seen below, the foreign large growth category, with its higher allocation to technology, more closely resembles the growth-led S&P 500 Index than it does other international equity funds.


  Morningstar Sector2 S&P 500 Index Foreign Large Blend Category Average Foreign Large Growth Category Average
  Basic Materials 2.5% 7.8% 6.1%
  Consumer Cyclicals 11.9% 11.8% 13.2%
  Financial Services* 15.4% 19.4% 16.7%
  Real Estate 2.5% 3.7% 0.9%
  Communication Services 3.6% 3.9% 1.5%
  Energy 5.4% 5.8% 3.3%
  Industrials 10.2% 13.5% 13.4%
   Technology** 22.9% 8.1% 18.0%
  Consumer Defensive 7.8% 11.7% 13.4%
  Healthcare 14.5% 10.8% 12.4%
  Utilities 3.3% 3.5% 1.1%
  TOTAL 100% 100% 100%


Source: Morningstar as of 3/31/2019

* Sector that tilts towards value

** Sector that tilts towards growth


What’s more, international growth funds provide diversification and a larger opportunity set than do just U.S. growth stocks. In fact, 56% of the top 50 performing stocks were located outside of the U.S. in 2018.3

The best approach to investing in international growth stocks depends on the kind of outcome the investor is seeking.

Finding the Perfect Fit

Passive investors could choose an investment strategy that tracks an international growth index which means they are stuck with the stocks contained in that index, regardless of their downside risk and whether they are the most compelling growth opportunities available.

Active investors choosing a strategy that is benchmark aware will likely run into the same problem as the passive crowd. Under this type of strategy, the portfolio manager either under or over weights each security in the portfolio relative to its weight in the benchmark. The resulting portfolio generally ends up looking a lot like the benchmark but with an active management fee attached to it.

An actively managed benchmark agnostic approach to international growth can scour the globe freely for opportunities without being restricted to the confines of an index. This provides investors with access to a wider variety of growth stocks including many hidden gems that are headquartered in Europe like Siemens Healthineers, B&M European Value Retain and Blue Prism. These lesser-known growth stocks benefit from the same global trends that U.S. growth stocks have enjoyed such as low cost of capital, rapidly growing demand and disruptive technologies. These companies’ products typically tap into so-called “mega trends” that are expected to last for decades.

Those who venture outside of the U.S. for investing might consider choosing an approach that truly expands their investment horizon and helps them find that perfect piece needed to complete the equity puzzle.


1. Morningstar Direct, Thornburg.

2. Morningstar Sectors: A sector is defined by Morningstar as a company’s general area of business. The stock market is divided into twelve specific industry sectors.

3. MSCI, RIMES. Non-U.S. stocks represented by MSCI All-Country World Index.

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The performance data quoted represents past performance; it does not guarantee future results.

Investments carry risks, including possible loss of principal.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

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