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Because Markets Change - Global Investing

Different Areas of the World Outperform at Different Times

Historically there have been multi-year periods when foreign markets outperformed, followed by periods when U.S. markets outperformed. But those changes in market leadership aren’t always obvious when we look at the 30-year performance history of the MSCI EAFE, a developed foreign market index, and the S&P 500 Index, a domestic index (as shown in the first chart, below).

The second chart shows the relative strength of these two indexes. Relative strength is a calculation based on the ratio between the return of one index versus another. It clearly identifies changes in market leadership.

30 Years of Domestic & Foreign Markets
S&P 500 vs MSCI EAFE September 30, 1983 - September 30, 2013

Performance: Over the past 30 years, there have been years when foreign markets like the EAFE were in favor and other periods when domestic markets like the S&P 500 were the place to be. But these changes can be difficult to spot on the conventional long-term performance chart, shown below.


Relative strength chart, below, makes it easy to spot the years when foreign markets led (relative strength line heading up) and the years when the U.S. market was in favor (relative strength line heading down).

The chart illustrates the performance of a hypothetical $10,000 investment in the S&P 500 and the EAFE index, respectively. This chart does not imply future performance. It is not possible to invest directly in an index. Historical performance represents index performance and does not reflect the performance of any FundX Upgrader Fund. Current performance of the FundX Upgrader Funds is available here. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The MSCI EAFE Index (Morgan Stanley Capital International, Europe, AustralAsia and Far East) is an unmanaged index of over 1000 foreign common stock prices including the reinvestment of dividends. It is widely recognized as a benchmark for measuring the performance of international value funds. The S&P 500 gained 19.34% for the trailing 1 year ending 9/30/2013, 10.02% for the 5 years and 7.57% for 10 years. The EAFE gained 23.77% for the trailing 1 year ending 9/30/2013, 6.35% for the 5 years, and 8.01% for the 10 years.

Follow Global Trends

In the global economy, most investors want access to growth from around the world. They don’t want to limit their portfolios to only U.S. investments. With a global strategy like our Upgrading approach, investors have access to worldwide opportunities and they can adapt their portfolios to global trends.

Long-term global trends can make it difficult for investors who have fixed allocations to foreign or domestic markets. It may not pay to be 100% invested in the U.S. when there’s a clear international trend in place. And holding foreign funds when they are lagging can hinder returns and increase volatility.

Rather than having a set allocation to U.S. and overseas markets, we believe investors may be better off in a portfolio that adapts to the prevailing market trends. The Upgrading strategy we use to manage the FundX Upgrader Funds leads us to invest in international funds when foreign markets are outperforming domestic markets – and we attempt to invest in U.S. funds when domestic markets are outperforming.

Domestic markets have been the place to be for the last few years, but there are signs that market leadership may be shifting to a new part of the globe. Foreign markets, particularly Europe, were very strong in September. Some believe that the U.S. markets are more fully valued, while Europe and emerging markets may be undervalued and have more potential for growth in the coming years.

Many of the FundX Upgrader Funds now have small allocations overseas, and if this trend continues, we’ll be led to increase the Funds’ foreign exposure.

We don’t know today what the future will hold for either foreign or domestic markets, but we do know that markets change over time, and we believe an active approach that can take advantage of global trends will be better able to navigate through these changes.

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