1. Currencies and international stock returns
Innocents Abroad
Currencies and international stock returns
Bray – Pi – Russell – Tassin – Wang

2. Bray – Pi – Russell – Tassin – Wang
Diversifying Internationally
Examining International Asset Allocation
Selling the Clients
Analyzing the Data
Presenting our Recommendations
AGENDA
Bray – Pi – Russell – Tassin – Wang

3. Diversifying internationally
2013 saw record-breaking domestic equity market returns
S&P 500 – 29.6% gain
DJIA – 26.5% gain
MSCI EAFE – 22.6% gain
Sandra Meyer, Founder, CapGlobal Advisors
Henry Bosse, CIO, Local State Pension Fund
Bray – Pi – Russell – Tassin – Wang
Case background
Issue we are addressing
Describe Sandra Meyer’s philosophy of investment management.
International holdings mitigate some market risk
Extensive research on international markets

4. Examining international asset allocation
Diversify portfolios with international holdings
Alleviate unsystematic risk
Unsystematic risk – “company” risk that is reducible through diversification
Extensive research on international markets
Quantitative modeling suggests that international asset allocation works
Bray – Pi – Russell – Tassin – Wang
Why is Sandra sold on the concept of international asset allocation?

5. Bray – Pi – Russell – Tassin – Wang
Selling the clients
Client Resistance to International Holdings
Familiarity with domestic companies and markets
Impression of mature markets as safe
Ethnocentrism
Easier to stay informed on just one market
Bray – Pi – Russell – Tassin – Wang
Why might it be difficult to sell her clients on this concept?

6. Selling the clients Educate Clients On:
Benefits of international diversification
Drivers and consequences of correlations among global equity markets
Impact of currency movements on returns of global portfolios
Annualize returns and deviations to ease client understanding
Bray – Pi – Russell – Tassin – Wang
Educate clients on (1) the benefits of international diversification, (2) the impact of currency movements on returns of global portfolios, and (3) the drivers and consequences of correlations among global equity markets
Bray – Pi – Russell – Tassin – Wang

7. Bray – Pi – Russell – Tassin – Wang
Analyzing the Data
Returns and standard deviations of international and domestic markets, and
Correlations between markets, , , and
Annual returns of Morgan Stanley’s EAFE and EM indices compared to S&P 500
Portfolios with mixes of foreign and U.S. equities, , , and
Efficient frontier of foreign and U.S. equities
Bray – Pi – Russell – Tassin – Wang

8. Bray – Pi – Russell – Tassin – Wang
Questions
Bray – Pi – Russell – Tassin – Wang
Based on the data you have calculated above, explain to Henry Bosse, why you feel that it would be wise to include some international diversification in the local state pension fund’s portfolio.
Human bias idea –