U.S.-based investors invested heavily in world equity markets during 2013, with $160 billion of net inflows going into U.S.-registered world equity funds (including exchange-traded funds). As of Feb. 12, this positive net-flows trend—with $15.5 billion going into the segment—had continued despite recent global market volatility.
As world equities remain poised to continue to gather assets, the international core equity segment remains a solid area for portfolio allocations in 2014, as many of the world's equity markets—particularly Asia and, to a lesser extent, Europe—have lagged the U.S. in recent months and now appear to be better positioned to narrow that gap. Asia stands to gain from improved exports as a result of the stronger dollar, while Europe looks to benefit from banking-system stability and slow but steady growth.
(Read more: ETF, mutual fund flows still up but iffy)
In the international multicap core equity space, passive products, such as Vanguard Total International Stock Market Index, should continue to gather assets in 2014 as investors seek to diversify their portfolios in these proven low-cost investment products. Many investors have become too overweighted to U.S. equities following their strong 2013 performance and should consider taking advantage of the opportunity to rebalance at reasonable valuations to a passively managed fund that has the greater exposure to both Asia and Europe.
Additionally, some actively managed funds in the category, such as Oakmark International Fund and MFS International Value Fund, have posted both strong absolute and relative returns and continue to attract new assets. As well, they now offer active investors a greater array of potential alpha opportunities than they may currently have domestically. Active funds that are well positioned generally have significant exposures to large capitalization names in Europe and, to a lesser extent, in Japan that should do well in a slow-growth global expansion.
Where have investors been putting their money in international equities?