Intelligent Exposure to International Markets
The Parametric International Equity strategy is a broadly-diversified equity investment process designed to efficiently capture the long-term returns of developed equity markets outside of the US.
As global markets grow in importance, so do the investment opportunities they create. Yet investors still face the significant risks and volatility associated with equity investing. Investors tend to become enamored with particular stocks, which can lead to concentration risk in the market. Examples of these ”bubbles” include Japanese stocks in the 1980s, technology stocks in the 1990s, and the more recent growth and subsequent collapse in the real estate, energy, and financial sectors.
Parametric’s investment approach is based on mathematical principles of diversification, compounded growth, and volatility capture. The International Equity investment strategy seeks to add value through disciplined portfolio construction, using the MSCI Europe, Australasia, and the Far East (EAFE) index as the benchmark. The strategy:
- Seeks to avoid concentration that can occur in capitalization-weighted indices by investing broadly across countries, sectors, and stocks.
- Seeks to reduce volatility and enhance the growth potential of the portfolio through a portfolio optimization process.
- Maintains target weightings and allocation through regular rebalancing.
The Parametric Approach
| Avoid Concentration | Minimize Volatility | Systematic Rebalancing |
|---|---|---|
| Create country, sector, and stock targets that avoid concentration risk: | Optimize the portfolio weights to reduce total volatility: | As country, sector, and stock concentrations build up, rebalance: |
| Target weights are calculated using a mathematical rule that tilts the portfolio away from the highest concentrations in the market. | A security-level risk model is used to minimize portfolio variance. | Rebalancing exploits the natural volatility of stocks by systematically selling when prices go up and buying when they go down. |
| Largest under-weights and over-weights are controlled to mitigate liquidity and turnover issues. | Constraints on the optimization model are used to keep the portfolio diversified and to avoid unnecessary turnover. | The amount of "rebalancing alpha" captured depends on the correlation, volatility, and trading costs of the underlying assets. |
| These targets preserve the rank order of capitalization weighting, but have higher long-term growth potential. | A lower volatility portfolio tends to outperform in difficult market environments and enhance the long-term growth rate. | Rebalancing triggers are sufficiently wide to avoid excessive trading costs. |
