Going Global: Inside EdgeRock’s latest model update

EdgeRock clients may have even noticed an uptick in trading activity last week. This rebalancing is part of our active management process, where our in-house Investment Team regularly conducts a sweeping analysis of EdgeRock holdings to ensure they continue to be appropriate for client allocations.

So what changed during this most recent iteration? We spoke to Chief Investment Officer, Rob Foss, to get some insight.

“Over the past year, we’ve been allocating to address increasing concentration risk and positive correlation among public asset classes,” said Foss. “Many of our recommendations have centered around a modest shift toward private markets and option-overlay strategies to mitigate risks presented in the current conditions of the market.”

The so-called “Magnificent Seven” (AAPL, MSFT, NVDA, META, AMZN, GOOG and TSLA) isn’t getting any less magnificent as a percentage of the S&P 500, and many investors are still at risk of drifting out with the current should the market pull back. Custom EdgeRock allocations are designed to differentiate in important ways from the full weight of the market.

There’s a whole world out there

EdgeRock has traditionally maintained a “home-bias” investment philosophy. 

What does that mean? It’s both a vote of confidence in the American economy and an understanding that most large American firms do quite a bit of business overseas. Apple doesn’t just sell iPhones in the United States. Facebook doesn’t just sell advertisements to the domestic market.

“We reason companies within the S&P 500 already generate much of their revenues globally, which is sufficient exposure,” said Foss.

This home-bias philosophy isn’t unique, but it is one of the ways we customize portfolios to differentiate from common turnkey solutions. Elsewhere it’s typical to allocate for international exposure as a matter of course. At EdgeRock—we let the data do the talking.

“The performance of the [international] opportunity set was relatively muted, and valuation alone was not a reason to justify an investment,” said Foss. “For this reason, we haven’t traditionally recommended an allocation to—or at least a large allocation to—internationally developed or emerging market economies.”

But markets aren’t static and neither are EdgeRock investment philosophies. Present conditions suggest there’s opportunity beyond our borders.

“Recently, we have witnessed strong interest in developed international equities and meaningful performance. This led to our decision to reintroduce international developed equity exposure in our internally managed models,” said Foss. “While we don’t think this exposure will produce results dramatically out of line with expectations, we believe it could help drive future returns for a number of reasons:

1. International stocks have lower correlations with U.S. equities, which could help smooth returns.
2. Valuations are cheaper, and historically, valuation disparities between U.S. and international markets normalize over time. While we do not expect performance like U.S. technology, we do believe that international exposure provides a great opportunity to further diversify into quality and value. Value (think industrials and financials), as opposed to growth, is very under-appreciated and unloved, and we are witnessing a bit of rotation trade. Further, international companies are increasingly buying back stock, which should buoy performance.
3. International stocks could benefit from a weaker U.S. dollar and interest rate differentials between central banks.

So while market conditions could always shift again, today they suggest a small pivot to global investment opportunities. If that changes, we’ll keep you posted.