It’s well known that investors have a home bias — they prefer investing in companies in their home country — and US investors are no exception. What is different about US investors is that their stock market is the envy of the world, so their home bias garners a lot of support.
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Renowned investors like Warren Buffett and the late John Bogle have long urged US investors to keep their money at home. The US is also widely viewed as the world’s safe haven, in part because big US companies are reputed to be the most stable and highest quality. If you’re a US investor, as Buffett and Bogle have argued, why go anywhere else?
Buffett is no stranger to foreign markets, though, and investors would be wise to take note.
US companies’ reputation for quality is well deserved, and broad market indexes reinforce it. A key attribute of quality is high profitability as measured by accounting measures such as profit margin, return on equity and return on capital. Based on all three measures, the S&P 500 Index’s profitability has been higher than that of the MSCI World ex USA Index and the MSCI Emerging Markets Index — which together cover most of the developed and developing world outside the US — for at least the past two decades.
But that doesn’t mean the US has a monopoly on highly profitable companies. In fact, I ranked the roughly 10,000 companies in the Bloomberg World Large, Mid & Small Cap Index from high to low based on most recently reported annual profit margin. Yes, the US is the most represented country in the top 100, but it accounts for only 15% of that group.
I did the same with return on equity and return on capital. The US accounts for 36 of the top 100 based on return on equity and only 14 based on return on capital. And just for fun, I ranked the top 100 again using an equal-weighted blend of all three profitability measures. The US claims 18 of them.
Read the full article here by Nir Kaissar, Advisor Perspectives.
