Balancing U.S. and international equity exposure

Based on Fidelity’s long-term research into capital markets, diversification, and the needs and sensitivities of target-date investors, Portfolio Manager Finola McGuire Foley and team consider an appropriate strategic equity allocation for a diversified portfolio to be 60% U.S. equities and 40% non-U.S. equities.

“We believe this mix effectively balances the diversification benefits of global equities with the specific needs of U.S.-based investors in longer-term portfolios, such as target-date funds,” says Foley, who co-manages Fidelity Freedom^® Funds (FFFEX) with Andrew Dierdorf, Brett Sumsion and Cait Dourney Earle. “Because the U.S. share of the world’s total market capitalization tends to fluctuate over time, we follow our long-term investment process rather than adjusting our strategic exposure to reflect shifts in the global market cap.”

Fidelity’s target-date funds are designed for investors who have retired or expect to retire in or within a few years of the fund's target retirement year. They invest primarily in a combination of Fidelity U.S. equity funds, international equity funds, bond funds and short-term funds. The allocation gradually adjusts until it reaches a mix similar to that of the most conservative portfolio, approximately 18 years after the target year.

Foley says that U.S. and non-U.S. equity markets have different compositions and are influenced by different performance drivers over time, underscoring the value of maintaining exposure to both as part of a diversified portfolio.

“The U.S. equity market is the largest and most liquid in the world, and U.S. corporations have demonstrated higher levels of growth, innovation and governance,” she notes. “U.S. investors are generally more familiar with and tend to prefer domestic equities, reflecting the common home-country bias, and their liabilities are typically dominated in dollars.”

Meanwhile, non-U.S. equity markets provide exposure to different economic cycles, growth and inflation environments, political systems and sectors,” Foley points out. For example, she says that about 40% of the U.S. equity market consists of information technology and communication services companies, while non-U.S. markets have greater exposure to financials and industrials.

“These factors contribute to the dispersion in equity returns across regions, so having a 60%/40% allocation can help investors navigate shifting capital market conditions,” she contends.

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