Private Clients Piggyback on Institutional Approach

With that institutional approach, he said, the perspective is that more should be invested in international because "these developed international stocks and companies are a little further behind than the US. in terms of recovery, especially the eurozone; we think about three years behind the U.S. in terms of recovery," he said. "Domestic equity prices climbed, but not as much in developed international stocks, and we want to take advantage of that and take risk off the table for the massive run up we've had here at home."

Getting past the home-country bias, he said, "regardless of what country you're in, is one of the behavioral aspects" of investing. Fortunately, however, Tomasch said that with clients on the private side, "it's very seldom you run into someone who doesn't understand [the need to invest internationally] or doesn't think it's a good idea."

The firm has exposure to emerging markets, which makes up "typically 20–25%" of international investments, and rather than relying just on one type of investment it makes use of a combination of ETFs, mutual funds and ADRs. For private clients, it tends to be more mutual funds, ETFs and separately managed accounts.

Currency risk is something advisors need to be aware of. Tomasch said that the strength of the U.S. dollar over the last few years has been almost like "a headwind over international returns." He pointed to Japan's stock market in the third quarter as an example. Q3 returns, he said, were "up 5.8%," but when those returns were calculated as U.S. dollar-denominated, they came out as "down 2.3%." The alternatives module the firm uses takes currency risk into account.

One other point that Tomasch raised concerned active vs. passive investing. "The U.S. has the largest, most well established and transparent stock market in the world," he said. "In terms of the efficient-market hypothesis, the U.S. market is the most informational efficient stock market in the world. We are 50% of the total world market cap and because of that our companies are the most well covered by financial analyst and accountants in the world. Because of this, it makes sense to stay mostly passive in U.S. markets while employing active managers for international investments, particularly in less-covered countries or markets."