August 14, 2019

Are Target-date Funds Going Global?

The United States stock market currently accounts for about 55 percent of global market cap. While this represents the largest percentage of the world’s market cap held by a single country, it leaves a full 45 percent in markets outside of the U.S.  The U.S. stock market is also the most expensive in the world, with a current (as of June 30, 2019) P/E ratio of 16.7x compared with the global P/E ratio of 13.2x. Though it accounts for 55% of global market value, the U.S. stock market actually only represents about 17 percent of the world’s stocks: approximately 5,000 U.S. companies versus 25,000 non-U.S. companies.

These facts remind us of the opportunities that lie outside of the United States in international and emerging markets. Having access to these opportunities in a diversified portfolio is as important for retirement plan participants as for any other investors, and target-date fund providers recognize this.

We have seen a slow but distinct shift to increasing the allocations to international equity in target-date funds. For example, the average international allocation as a percentage of the total equity allocation of the largest ten target-date fund families’ 2040 funds has grown from 31% in 2014 to more than 37% in 2018.  One of the largest target-date fund providers has increased its 2040 fund’s international allocation (as a percentage of its equity allocation) from 38% in 2014 to 53% in 2018. The chart below illustrates the change in international allocations as a percentage of the overall equity allocation across the 2040 funds of the largest ten target-date fund families, and you can see the slow but steady increase across most of the funds.

Given the current market landscape, we anticipate that this trend will continue. Plan sponsors should be aware of this shift and pay attention as the allocations and glide paths of their target-date funds change. Consider re-evaluating your target-date fund suite every three to five years to ensure that it is still optimal for your participants’ needs.

 

Sources:

“U.S. Stock Market is Biggest & Most Expensive in World,  but U.S. Economy is Not the Most Productive,” by Ron Surz; Nasdaq; April 2, 2018

“60 Stock Market Statisitcs & Facts for 2019”; Lexington  Law; January 1, 2019