Good afternoon and welcome to the Orion Portfolio Solutions portfolio Recipe Webinar for the month of March of 2023. And this month we're talking about the global portfolio. My name is Rosty Vanman, I'm the Chief investment officer at Orion Advisor Solutions. So why are we talking about a global portfolio? And I do have a couple quick stats. So last year non-us stocks outperform U.S. stocks despite the fact the US dollar had a pretty strong year. That usually doesn't happen. That the US dollar is higher, usually U.S. stocks outperformed. Big reason for that is of course the US benchmarks tend to have more growth stocks, more technology stocks than they did significantly underperformed last year. So looking at the year to date numbers for this year, however, the dollar is basically flat and growth stocks have significantly outperformed value stocks. However, international is slightly outperformed coming into today. Have we seen the pivot? International has significantly underperformed the US for the last five and 10 years. One other stat, this comes from our monthly chart pack at Orion portfolio solutions called starting points matter and we do look at a composite of relative valuations going back to the beginning of this century. And over that time frame U.S. stocks have traded a premium of 30 to 35% to non-us stocks on average that premium currently is about 70% just below that, so kind of double that average over that time frame. So relative valuations and relative performance seems to be on international side. We will look at the average equity portfolio at Orion portfolio solutions. The equity allocation is about 24% right now. Meanwhile, the global benchmarks are closer to 40%. So I think it's a good question to ask, is this a time for a more global portfolio? Before I introduce today's speaker, just a couple quick housekeeping items. And first of all, the format of this portfolio recipe webinars, I mean, the same as it always has been. It's going to be 20 minutes for each strategist and then we'll have 20 minutes for Q&A at the end. Four questions. There is a box right below the main presentation screen. Please submit your questions there. In the lower left hand corner, you'll see various resources related to this webinar. Also want to point out a few hours after this webinar concludes, we will send out an e-mail with the replay and again all of those resources. So As for today's speakers, our first speaker is Jeremy Groot from I am global partner. You may know from Litt McGregor as well where he's been since 1999. I've been following Jeremy's work, really going all the way back to 1999, really looking forward to having here on the webinar. And we also have Frank Chisholm, senior product manager at Vanguard. He's been at Vanguard for 12 years in history for nearly 20 and something I want to point out about Vanguard and I think it's underappreciated by many advisors. They put out a lot of excellent white papers and includes a white paper on global investing and how much you should allocate to non-us stocks. We know what their slides are awesome. I've had a sneak peek. I'm going to quit talking right now and my hand the ball off to Jeremy. Jeremy, it's all yours. OK. Thanks, rusty. It's great to be here. Thank you everyone for your time. Looking forward to a good discussion. So let me get the right slide. I've already hit the wrong button here. Here we go. So I guess I'm going to start with the the bottom line here and then kind of work back to to where we come with these estimated estimated returns. But. Every quarter we publish 5 year estimates and expected returns for key asset classes. And our focus today is is the top section there in the red box for equities and global equities. And as you can see, our base case for the S&P 500 index is for what we consider you know medium term over the next 5 plus years returns in the range of of about 3 to 9% in a base case, this an annual average return. For developed international equities, which would be an ether type index, we're estimating 5 to 12% annualized return range. And then for emerging market equities the range is 7 to 14%. So you know if you just take a midpoint of those ranges, US is roughly 6% nominal expected return, international about 9% and EM about 11%. So you can see, you know we consider the prospects for equities outside the US to be significantly. More attractive at this point looking forward and I'm going to spend most of the time on my prepared remarks digging into the underlying inputs and assumptions for how we derive these estimates without getting too much into the weeds of course. Before doing that though, I wanted to highlight two other big picture points about these return estimates. The first one is that they are in in local currency terms for each region, so. They do not include the impact of currency appreciation or depreciation. And you know Rusty mentioned we probably all know the importance of how the, the, the direction of the dollar can really have a large impact on returns for foreign assets. And so you know our view is I'll talk about a little bit later is that we do see the dollar which has been really a headwind. To foreign equity returns over the past 10 years turning into a tailwind. So in addition to you know the numbers we had we're showing here, we think there is some added likely return from currency benefits. Of course the converse is true if the if the dollar continues to appreciate that would be a headwind for US based investors outside of of the UN and non-us equities. The second point is just that you know at I, MGP and and Lipman, Gregory our research team, you know, we always include and consider a range of scenarios in our estimated returns analysis. And really when we're managing and constructing portfolios you know we we think about not just one scenario you don't want to bet on just one outcome because you know first of all we know the future is inherently uncertain. We've all been surprised. We should not be surprised that we're surprised because that's that's the lesson of history. But there is in particular a wide range of potential returns for a volatile and you know risky asset class such as stocks. You can just look at history and see the wide range of returns over any five year period. So while we'll focus here on the base case, you know we do think it's important to think about a range of estimates and and that's really where diversification comes in. Sorry, keep that clicking the wrong button here, OK. So you know Rusty. Mentioned valuations. Just a quick step back just in terms of constructing return estimates for for equities, you know, they're really 3 components when you are building an estimated return for equities for stocks, two of them are fundamentals, earnings growth and the dividend yield. And then the third piece of that is changes in valuation or PE multiples. And so, you know, as we again construct our estimated returns. We're coming up with assumptions estimates for earnings growth. The dividend yield is pretty straightforward and changes in valuations which can be a big swing factor, we're probably all aware. But just a reminder, over the shorter term, valuations really have no predictive value for actual realized equity returns, but history shows that as you extend your time horizon to five 1020 plus years, valuation is actually the most important determinant. Of the realized equity returns, the other two components again are fundamentals, earnings growth and dividend yield. So we believe as a fundamental valuation based investor that over the medium to longer term fundamentals and valuations are what matter. But in the short term markets can be driven by you know human heard behavior, fear and greed. To this it's the weighing machine versus the voting machine, the famous Ben Graham comment. So as we look at this chart, this chart, you know, addresses the valuation point and this is a cyclical cyclically adjusted P/E, also known as the Schiller P/E or the cake P/E for the US, Europe and emerging market indexes at the index level. And you know, the obvious point here is that emerging markets and Europe appear to be significantly undervalued relative to the US market. And you can really see the divergence in those relative valuations began after the 2008 financial crisis where the gap, you know, has sharply widened over the the following 12 or 13 years until it's narrowing a bit recently. Another observation is that the emerging market stocks performance, which is the yellow line at the bottom, they look historically cheap, not only versus the US but relative to their own valuation history. So we see this relative valuation. And absolute valuation attractiveness particularly for emerging markets, you know, so valuations are clearly a key important tailwind to as we look forward for the next 5 to 10 years. I'm just going to keep going rusty if there's if you want to interrupt with the question, but I'll just keep keep flying, keep on rolling. These are great slides. Yep. Okay. So let's focus first on emerging markets and then I'll be more brief when we we hit the Europe since it's the same type of analysis, but let's start with fundamentals, earnings growth, I think this is a really interesting chart. It, it shows rolling five years sales growth or revenue growth for the MSC i.e M Index. And again and this is an EM local currency terms, so we're taking out currency effects from translating the dollars. And what I really highlight is the period from 2006 to 2015, you can see pretty consistent earnings growth. Again, this is 5 year annualized growth. It was between 5 and 10%, you know, with some cycles in there. And then you see the sharp spike leading up to the 2008 financial crisis, when we may remember we had a commodities boom, the China growth boom, really supercharged EM earnings. But then look from 2016 to to 2021 and earnings growth has effectively been zero for emerging markets for this extended period. Now we're seeing an increase more recently, but the bottom line there is that EM earnings fundamentals have really been poor for the past, you know, 10 years. And that's the main reason emerging market equity returns have been poor for the past decade. You know, we showed valuations, but what's driving that is really fundamentals have not been good for emerging markets growth, particularly coming off of a very strong boom period. Now you'll probably hear this a few times, but the key point is we don't think the next 10 years, next 5 to 10 years are going to be a repeat of the past 10 years. You know, we don't want to invest in the rearview mirror, so our base case analysis. We're we're assuming that sales revenue growth for emerging markets will be in between these these periods with about a 5 to 7% annualized sales growth range not as high as the the boom years up to the financial crisis and certainly not zero as we've seen for most of the past decade. So we we have this estimate of sales growth the other piece is estimating profit margins profit margins and sales growth will give you earnings growth estimates and I. Didn't include our our profit margin chart, but if you if you look at that for emerging markets it's been relatively consistent in a narrow range over the past 20 years really between about a 7% and 10% margin. You know again cycles but the the channel has been between 7 and 10%, the median has been about 8 1/2%. Our assumption again for our estimated returns base case is an 8 to 10% range. For EM profit margins over the next five years and again we're using ranges even within our base case because there's you know, just acknowledging that the out the uncertainty in the range of outcomes we've therefore putting together profit margins and sales growth gives us earnings growth assumptions between 2% and 8% annualized over five years 2 to 8% earnings growth. The dividend yield is about 2 1/2%. So you add that dividend yield to the range of two to 8% expected earnings growth that gives you an expected return putting valuations to the side of 4 1/2 to 10 1/2% for our base case from fundamentals. So you know 5 to 10% type fundamental return. Now quickly let's turn to valuations. Another way of looking at this besides the Cape ratios is just a simple 12 month trailing P/E ratio. For again for emerging markets and the US stock, the S&P 500 Index, this chart shows the ratio of P E's of EM to the US so when it's going down, the emerging market valuation is declining relative to the US and you can see we're at a point as of the end of February about the third lowest relative valuation in history near the all time low. The yellow dotted line shows the. Relative PE valuation, we assume in our base case scenario which we think is relatively conservative relative to this history, we're not assuming we revert back to the long term average. We think there was probably some overvaluation early on for EM indexes. What the underlying assumption here is that we assume the emerging market index P/E is about going to be about 14 times and our base case S&P 500 is around 20 to 21 times. So you get about a 33% discount EM at 14, US at 21 times base case. I'm sorry for all the numbers, but that that kind of gives you a sense where we think relative valuations go on an absolute valuation. That implies the EM index will be trading at about a 14 * P E and is currently at 12 times. So we see valuations for the emerging market index moving from 12 to 14 times. And if you annualize that over five years, that would add roughly 3 percentage points more to that five year return. So the fundamental EM return is about 4 1/2 to 10 1/2% at about 3% for valuation driven returns as we revert back to what we think are more normal. And that gives you that range I showed in the first page of about 7 1/2 to 13 1/2% base case five year annualized returns. Again, we, you know we did a lot of work underlying to come to those assumptions, but that's really how we build our, our forecasts and the midpoint is you know we think low double digit returns are reasonable plus some currency kicker. Okay, I'll be a little quicker with Europe, same type of analysis. But in this chart rather than showing sales growth, I thought it was useful just to show the actual earnings per share for the European MSCI index and. Our focus is on Europe. Europe comprises 65% of the EFA index and frankly, most of our active international managers are even more heavily weighted to Europe and pretty heavily weighted underweighted to Japan. Japan has had some crazy valuations, so we feel more confident in focusing on Europe and that's the bulk of the EFA index. This chart shows MSCI Europe index earnings and again, look at this kind of middle period we're basically from. After the financial crisis, earnings effectively went nowhere for 10 years, around that 80, you know, 80 point until just finally late last year when it finally surpassed the peak of 2007. So, you know, this explains a lot of why European equities have been crappy investments. The fundamentals have not grown in the US market. If you look at those earnings charts, we've seen strong growth again, a lot driven by tech. As Rusty mentioned, so our base case then to just kind of boil it down, we are assuming ultimately earnings growth will be in the low single digits from current levels. We've got 3 to 5% revenue growth, 7 to 9% profit margins and from that relatively elevated point where we are now with with earnings that translates to to low single digit earnings growth for Europe. So not not great fundamental growth, but there's still positive growth there. Let's quickly hit valuations. Again, this is Europe versus the US just a simple P/E ratio near all time low is very much below the average discount over the past 25 years. Currently the European index is about a 13 * P E on trailing earnings. Our base case is 17 * P E, So. Again, we believe there will be some closing of this gap that implies about a 20% discount to the US that's below the historical average. We think we're being relatively conservative, but we do expect a boost from valuation improvement absolutely in Europe. The dividend yield in Europe is much more attractive than the US at 3 1/2%. So that's an important element component of your expected return put the valuation piece, the earnings growth piece and the dividend piece. And we get that range of about 5 to 12% for European stocks not including potential currency benefits in our base case. All right, my last slide here is the point about currencies and I just wanted to emphasize again how important currency impacts can be when you're a dollar based investor, you're not hedging your currency exposure and you're investing in non dollar assets. And this, this chart I think is pretty powerful. It shows this very tight relationship between the relative performance of US versus EM stocks, which is the the orange dotted line and appreciation and depreciation in the broad U.S. dollar index. So Simply put, when the dollar is appreciating, when the blue line is going up, we see U.S. stocks have strongly outperformed relative to EM stocks past 12 years. And when the dollar, the dollar is in the down cycle, you know 2002 to 2011 there was strong out performance from EM versus the US and the same relationship generally holds for international stocks versus the dollar. This is focused on EM where the where the impact is even stronger, but the the dollar currency effect is also quite strong for developed international. Now you can also see in this chart that the dollar tends to move in pretty broad multiyear cycles of appreciation and depreciation. And again the past 12 years has been extremely strong upcycle for the dollar. I think I I peaked at Frank's slides, I'm not going to spoil too much, but I think he has a slide that shows the currency effect was 2.6% annually a a negative drag on foreign equity returns over the past decade. So 2 1/2% subtracting from your you know your your acqui XUS. Returns purely from the dollar appreciating, I mean that's a huge 2 1/2% annually for 10 years is huge. So again, we don't believe the past 10 years will repeat over the next 5 to 10. And we and other strategists that we respect believe there are a number of secular headwinds to the dollar. We can talk about them later if we want, but that are suggestive that we're likely at the beginning or near the beginning of a multiyear period of dollar depreciation. I mean just quickly evaluations relative interest rates, the the trade deficit, fiscal deficit and the potential for a global recovery. All those factors are negative for the dollar. In the very short term, the dollar can certainly appreciate if there's a risk off risk aversion of flight to safety. The dollar is still viewed as a safe haven asset. So again short term, you know all bets are off, anything can happen, but we think again 5 plus years. What has been a headwind to foreign returns will turn to a tailwind as the dollar declines and that might add 1 to 2% or more to international stock market returns over the coming years. I'll, I'll pause there, I'll stop there and hopefully that was informative. Yeah, Jeremy, that was great. You know, this is a portfolio recipe webinar and that first course was definitely tasty. So thank you very much. So let's bring in another ingredient and I, I, I've also taken a sneak peek at the slides from Vanguard. So. So, Frank, take it away. Oh, by the way, one housekeeping note again, we do have some questions coming in. Again, please submit questions and we're going to start getting to them after Frank's comments. Great. Thanks, rusty. Thanks, Jeremy. I appreciate it. And just as a quick preview, you know, I'm not going to say anything to. Terribly different from what Jeremy had to say. I think there'd be some it's sort of additional color and and maybe a couple different ways to look at it but hopefully you know nothing here that's too too different and I'm going to I'm not going to go in order with my slides. I hope people who who like things to be in order won't be too terribly offended but move around a little bit let me know trying to get the slide 25 here and as soon as it comes up I'll I'll get started. Oh, so you have it there. I see. So, so a couple things and let me start first with how we think about portfolio construction at Vanguard. So there's all of our, our model portfolios in anywhere where we're constructing portfolios. That thinking is primarily going to come from our investment strategy group. And within our investment strategy group, there's there's two groups within there that that that play a role here. One group is our our group that looks at our outlook. So there are what we call our capital markets team. They put out our annual outlook for what's going to happen in the market. So a lot of what I'm going to touch on today has to do with their thinking around asset class returns. You know what do they think it is going to happen on more qualitative basis with interest rates etcetera. And then the other group is really a portfolio solutions group and and a lot of what they spend their time on is a little more qualitative and a little more strategic and and longer term in nature. So I just want to be clear as we go through this, there'll be some things that are like, hey, that sounds like that's pretty much an Evergreen approach to portfolio construction. And then we'll have some things that are a little bit more point in time. What are we thinking about over the next handful of years, you know, So what I want to start with and and Jeremy talked a lot about where are we from evaluations point of view, what do we think about returns and I'm certainly going to cover that in a minute. But what I'll start with if I only have one slide and I always say that and no one's ever said Frank, you only have one slide but. In the event that someone ever said that to me, this would be my one slide. And what you're looking at is the portfolio diversification to be gained from adding international equities into a all equity portfolio. So as you move, you start with with none in international on the left. You add 10% increments into international equities as you move to the right and you can see your overall, your standard deviation is going to drop in that say 20 to 50% range. So you know at first and foremost returns aside and what we think is happening in the world, we're always going to say you want to be within that range, you want to be within 20 to 50 because that's where you're picking up the the most diversification bang for your buck if you will. So all of our portfolios, I'll just start off by saying this, all the portfolios that we're going to that we look at and we manage are are for the most part almost exclusively sitting at around 40% in international equities. So we're at the kind of you know at the bottom of that curve maybe a little bit to the right of it, but for us 40% international equities, you know you're you're now where market cap is. It hasn't always been there. It used to be you know if you go back ten years it was more like 55 international instead of 40 international. But the US has outperformed as we've been talking about quite a bit here for years. But you know now we actually global market caps kind of caught up to us. So the first thing we would always start with is let's talk about diversification and why do you want. International equities in a portfolio and why do you want a meaningful allocation to international equities is really going to be around this diversification idea. Then part of that of course is return, but a lot of that is really about dampening volatility and having an uncorrelated asset class. Now again, international equities, US equities correlations fluctuate over time. They, their correlations probably have picked up a fair amount over the last say 1015 years. We're obviously cognitive of that. But however, you still get a diversification benefit and even though something can be relatively positively correlated doesn't mean it's going to be perfectly correlated every year. It doesn't mean it's going to move in lockstep all the time. So there will be diversification benefit to be had. So again just wanted to start there in level set it if in a in in a vacuum not thinking at all about where returns going. We're always going to going to want to have probably 30 to 40% based on our chart here. There's probably a sweet spot in terms of how much do you want an international purely for diversification benefit. Now if we if we do want to talk about you know Jeremy spent a lot of time talking about I must switch sliders makes give it a second to to come through the one thing we do want to talk about is there's you know often we discuss I don't think I have this one there yet. There it is. So a lot of times when we talk about valuations, right and Jeremy spent a lot of time talking about you know EM valuation relative to US valuation, Europe valuation relative to US etcetera. The other thing we always want to do is look at, at the valuations relative to the history of that, of that market, right. And the and the reason for that is you know you EM could be a little bit have a little bit of a lower PE purely because of the structure of the market and Rusty mentioned this earlier. You know EN markets are not as as tech heavy, they're not necessarily a growth heavy that's where you have higher multiple. So if you have banks at fifteen 2025% of your of your index, you're going to have a lower multiple because banks and utilities and material stocks tend to have lower multiple. So we also want to look at where your multiple sitting today and then how is that compared to historically. So this is a busy slide. I'm not going to pretend like it's not a complicated slide. But if you if you look at what this is is we're showing your P/E along the bottom for each of the markets US developed and and then emerging and then we're showing where was your P/E point in time and then what was your next 10 year return, right. So if you look at all of these as you move further out on the bottom and you have a higher P/E you're going to get a lower return over the next 10 years. So if even if you just take a move aside for a moment the idea that. Where is the valuation sitting relative to the US? If you just look at the markets themselves, generally speaking for developed international and emerging in the US, the lower point you have is a starting point for your for your P/E, the higher expected return you're going to have over the next over the next 10 years. Jeremy mentioned this earlier, valuations don't tell you a whole lot about the future of equity returns, but they are in fact the only thing in our opinion that has any predictive value, right. We had a famous chart once where we showed. Consensus GDP and valuations and rainfall and rainfall is a better predictor of future stock returns than consensus GDP. But equity valuations, current equity valuations are probably your best indicator. So I won't go on and on about this chart, but what we've circled there is where we are now. So the idea is based on where P/E's are sitting now, that's what you're we anticipate the next 10 years is going to, is going to bear out. But it's a very simple story. You know where you start matters, I think Jeremy said that Rusty won, you know where you start matters what your current valuations are matter, it matters relative of course as Jeremy talked quite a bit about, but it also matters just in terms of that individual market itself. So couple things about the way we've historically talked about international, I just want to set this up before I show the next slide is our investment strategy group. So again the the group that does the outlook has been calling for international to outperform since 2013. So in other words, they've been wrong, right, they've been wrong and they've been wrong meaningfully. And and we've been out talking to advisors for years like, Hey, International for a lot of these reasons, evaluations, the way the markets are moving, interest rates, what have you, there's plenty of reasons. And so finally we said to that group, look, you need to explain to us why, why do you think over the next 10 years international is going to outperform the US So what they did for us was a really interesting thing. And they said let's explain why the US has been outperforming, right. And and Jeremy got it some of this, but I want to show you here when it loads they were able to deconstruct the outperformance of the US equity market over the past ten years. And then we can also take that and look at what we think will happen over the next 10 years and and be able to explain that. So what you're looking at is the US market on the left and its performance over the last 12 years through January. And then at the other end, you're looking at XUS, right and we're going to look at a handful of things, multiple expansion, explain the difference, earnings growth explained a bit of the difference. Dividend yield is in blue because there's a higher dividend yield in international markets in the US so that was a negative. And then lastly currency movement, which Jeremy talked a lot about, Rusty talked a lot of, you know, mention that as well. So when you look at this and you say why did the US market outperform the international market over the past 10 years? This is what led to and I would argue one of the biggest things is multiple expansion, right, so valuation expansion, so P ES have gotten higher growth, stocks growth drove the market for the last 10 years. A lot of that is some was earnings growth, but a lot of that was actually just pure multiple expansion multiples are higher. Jeremy had great charts about P/E in the US is higher than it is other places and that's because the P/E is actually expanded, right. So if your price, if your earnings stay relatively the same or maybe they go up some, but then your price expands or your price goes up more. That's where your P/E expansion comes from. So that's been a lot of what's explained over the last 10 years. Why the outperformance now again, we asked them like, OK, cool, can you flip now and talk about why we think it's going to be different over the next 10 years. So when you when you go the other way with that now one thing I will say is we don't anticipate the outperformance for the international market to be quite as significant as it was for the US market. Over the past 10 years, but we expect it to be more honestly and it's the same things in reverse, right. The either either you can either think international markets valuations are going to expand or probably we'll see some valuation contraction in the US Jeremy already talked about positive earnings growth stories in in Europe and emerging maybe a little bit less. So here you get the benefit of higher dividend, higher dividend yield and then hopefully you you don't have a strong U.S. dollar as a headwind as well. So here we're projecting that the international market, you know at all things being equal, ought to ought to do better than the US over the next 10 years. Now again, you can't hold me to it. We've been saying this for a long time, but we think now may actually be the appropriate time for that to happen. A couple other things I just want to hit on briefly. You know Jeremy referenced this. In terms of the return and I do think it's important because a lot of people lose sight of it is that it's not just and I'll wait for it to come up here, but to talk about the currency. The I think the big thing here and you can see in the slide is you know it is important to break this out because a lot of times and we've seen this in in various market environments, you do actually have positive, well in this case you know the UK was positive in 2022. Your currency return, because the US dollar got strong, hurt that. But if you look at the other markets on the slide, you can see that we have, you know there's been plenty of times where we're not playing times, but it's been a meaningful portion of that return has been eaten away or completely overwhelmed by currency returns. So in fact you would have done much better being in the local currency now. And again we have a lot of conversation around currency hedging and should you be hedged and should you not be hedged and what we've traditionally think on this. You know we tend to not hedge on the equity side. We do hedge on the bottom side. Happy to explain why we do that in our thinking, but normally it'll wash out, right. So the currency return over long periods of time, 101520 years, the currency will turn, will wash out, you'll benefit as much as you as you don't benefit etcetera. But last year particularly was a pretty, pretty meaningful year and even with that in the fourth quarter international did great, outperformed it really almost 2 to one with the US equity market it. Now a couple things I want to hit on because the, the, I think the biggest challenge we've had when we've been telling the story over the last few years is clients have said OKI get it, but but you know, how do I get over the fact that the US has outperformed so much and how do you tell the story and how do you convince in clients that now is the time for international or it's important to have it on the diversification side when you certainly have Warren Buffett's, you know. John Bogle used to say like a lot of people would say like just only SP500 and and you're going to get everything you need. So you know we worked hard to put a couple things together at least to help have that conversation. You know, one easy way we always talk about is to remind folks that it was only about 15 years ago and Jeremy had a slide that references as well. There was only about 15 years ago that International had a huge outperformance streak and for various reasons. And so this is a chart, we update this chart every quarter and it's just important to remind folks that it's about half and half roughly. If you look at that about half the time international is going to outform US is is going to outform the other half. I'd say the trick with this is it's, it's you know where we've seen the periodic table and that was great when you had you know emerging was at the top one year, the bottom the next year, the top the next year etcetera. This is a little different because US you know it's. All non-us outperforms for a long period of time and then US outperforms for a long period of time. So it's not quite as short as short of cycles as we might prefer. Might be a little easier to keep people more diversified if things didn't run for so long. But it's important to remember it. You know, it does change, it will change. There's lots of reasons why it will change, you know, the other thing too is just the the you know, if for folks who are math people, you know, if you look at how long this US bull. The bull market in terms of US outperforming international, let me just give it a second for the slide checker. It's it's been a it's been quite a run and it's hard to imagine just from a kind of math mean aversion point of view that it could continue to go quite that dramatically for that much longer. So you can see and what we're predicting again this comes from our Outlook group is that. The cumulative return of the US over international is if you look at the blue block there for 20222032 you know that medians going to come down pretty meaningfully like you're really it's and again it's it's in many ways it's a meaner version and and when we talk about earnings growth when we talk and and multiple expansion things can't multiples can't expand forever growth can't go forever and and again you know anybody who said this three years ago. You were wrong because it did keep going but at some point it it, it kind of has to slow down and I think obviously the big impetus for us here is interest rates, right. So when money's free growth can be a bit unlimited, you now have interest rates and it's amazing. I started long story, but you know back in 2006 I was on the phone with clients and explaining to people the two different money markets they had to pick from and their 41K account and. They both paid 4.75 or 4.8 in a in a money market and we haven't seen that for a long time. But here we are again with those kinds of rates. So if money costs 4% or 5%, you can't just grow, grow like crazy. You have some of that's going to have to be temperate and I think we're going to see that, see that start to, to come into play. And then the last thing I want to hit on, we, you know we have a handful of things again. Jeremy talked about this and I just want to hit on it, make it really clear. It's there's also a dividend story right. There's been a focus on dividend investing for a long time. People favor dividends, retirees favor dividends. The structure of non-us equities is such that they tend to pay higher dividends. It's just what those markets sort of demand and expect etcetera. So to this day right now you're still getting almost a full percent out of this tax implications and other things but. You mean for dividend yield and again that was part of the charts I showed earlier in terms of why are you going to outperform. But this this kind of slide helps I think with with clients who are a little less excited about international. It also helps to be able to say, hey, it's a good idea from diversification point of view. It makes sense when you think about current valuations and what do we see happening in the world going forward. But then also there's some real practical things as well like a higher, higher dividend yield. The other thing that I don't have a slide for, but you know the last thing I'll say about kind of how we have this conversation too is there's a lot of very big companies that are not US based. And I think you know that that's the other thing we try to remind folks about. You know you have Toyotas, you have Nestle's let alone some of the the growth tech stocks in China. Again China's can be a everybody's going to feel a little bit differently about that but but suffice it to say that there's lots of. Very meaningful large size company that have very comparable businesses to what's happening in the US and they're good growth stories as well and not owning enough international, you're not going to participate in those those stories as well. All right. So, so let me stop there rusty that's. I pretty well did everything I want to hit there and and see what questions folks have that was that's great Frank, lot of lot of good stuff here. I love these slides. I have a bunch of questions, let's hit some questions from the audience first though. So again you want to have some questions that Q&A box is right below the main screen. And that first question, well actually I talked about the global, I talked about a couple of portfolio recipes here as a question sort of queue up and it's just a really simple recipe just blending. You know, 50% from each of the firms here that has all the different risk targets on the Orion Portfolio solutions platform as well. So this kind of gives you a taste of using sort of the different strategies. Now in terms of questions, the very first one is talking about what I think is one of the big topics that international investing. And my own experience where I sit is that China, there are investors who love China right now and there are other investors who hate it. And it's obviously is a significant component of the global economy and some say the reopening of the Chinese economy is the economic event of the year for the global economy as well. Where do each of you stand on China and we'll go back to Jeremy first, OK. Yeah, it's a, it's a great question. It's you know another another point. China is about 1/3 of the. MSCI, the EM, you know, equity index, so it's a second largest economy and by far you know the largest emerging markets equity markets. So I have a, I guess I look at China in a couple ways and and thinking about it more tactically which is again we we think of tactical as a multiyear horizon not the next six months, but you know. Couple years because giving time for fundamentals and things to play out versus a longer term strategic view and I guess I'll just jump to the strategic view. You know we have become less optimistic, less confident, less bullish on China investments for at least you know foreign based investors in the equity market than we were ten years ago. Five years ago even and you know getting without going into details that the the reasons are what the people that probably hate China in that dichotomy you mentioned you know it's it's really starts with the the the administration and G the you know his third term and the regulatory political economic changes that have moved away from you know more. Capitalist market oriented system was still obviously a Communist Party. So that's a key piece of again looking longer term why we've become less optimistic about having a large you know allocation to China. And another piece is the demographics there are terrible. Again if you look at the the birth you know rates and population it's on the climb so so basically China you know private company growth that can can then. Deliver returns to equity shareholders there. You know there are a lot of steps there and the government you know command of that has become more negative and again it's not black and white for for us as investors you may have a reason you just don't want to invest in China. But as in as the CIO looking at it from an investment perspective, we think there are it's, it's less, it's a less bullish story looking out you know 5-10 years plus. However, the the key point you know, for a shorter term horizon is, is obviously the reopening from 0 COVID and the fact that China now is in a strong recovery and the government for their own interests, Communist Party, you know, knows it has to support growth to keep the population happy, to keep the party in power. So there's an alignment shorter term with we think private sector growth. Equity market appreciation and so we're you know we would like as part of our emerging market overweight. We're comfortable with the full allocation. You know to China, if I have a couple more seconds, I'll just make some comments because we've spoken with the several of our emerging market active managers and I think they share that. You know just kind of the view I just expressed which is somewhat more concerned looking out strategically longer term. But you know Michael Kass at Baron, the Baron emerging Market Growth Fund is one of our core active holdings. He's emphasized the the attractiveness of many China a shares. So the A shares is the domestic equity market and the Alibaba's and $0.10 are in the, the, the external market, the the Hong Kong market or a Dr. So these are smaller midsized companies that are more focused on domestic. Consumer demand and more importantly are aligned with you know he's looking for companies aligned with the government. What the government wants is self-sufficiency. They want technology in house, you know they see the the bipolar world. So a theme of of passes that has about 12% of his fund in a shares. The MSCIMEM has only about 5% in a share. So a major difference from the index is getting exposure to domestically oriented Chinese businesses. That are on the side of what the government wants and clearly you want to be on the same side as the Chinese Communist Party. You know we saw what they've done to some other industries and companies like Alibaba and so forth. So that's an opportunity and it was also echoed by Phil Langham who is the PM of the RBC Emerging Markets Fund, a more of a blend fund another one of our active managers basically echoed that point he's. Underweight China because he doesn't like the political economy of it, but he likes smaller companies that are likely beneficiaries of China wanting to develop its own expertise. So I'll stop there. I think it's a shorter term, longer term story and maybe an active management story. Awesome. Thanks, Frank. What do you think? Yeah, the no, I'm going to go with what Jeremy just said, which is it's really an active management story. So if you think about, you know, from. From you know our investment strategy group would have some thoughts about growth in China and the opening of that market and lots of other things. But the way you know our our model portfolios are set up, you know we do have we, we set how much do we have in US versus international and exercise. But once we do that we're purely market cap weighted both sides right. So if we say 40% is going to be an international, it's going to be an international according to the to the weight so. How much we haven't developed, how much we have in emerging is going to follow along footsie's view of that world and we're going to allocate to China as Footsie has them at market cap weight in the markets. Now is that. So we're not going to put a value judgment on that. Where we're, we tend to be market cap weighted investors. We generally speaking are going to say you know folks are always asking us hey what about reeds, what about utilities, you want to overweight this, underweight that. Aside from how much do we have in US international, the rest of it is just going to be market cap weighted. So we finally have some creative tension on this call. I mean you guys agree on everything. We finally have the passive versus active question here. Yes and and well and and you know Rusty to go back, I mean I think I think the the key to this is This is why you combine active and passive together, right is you because when you do this you're going to have folks who are going to make an active decision but then you're also going to be. Somewhat range bound by having having passive as well so that if you know either either one is is terribly wrong or or moved in the wrong direction etcetera. You're going to have to have some kind of balance there but it's it's more that we we you know we're just we're not we're really never going to make an active call to to overweight or underweight any particular sub asset class or style within that or individual country but. Yeah but it is good to see a little little. So Jeremy what is the follow up why active and international overpassive. Let's do it out a little bit. Well I mean you know we've we spend a lot of time trying to you know pick active managers. We know the you know the the odds are you know you look at the odds they're not in favor of of successfully doing that over the long term we've. Mentioned you know let me Gregory going back 2025 years we believe you know we build a an expertise and and really the the key for us in our approach and I'm going to I'm not going to go and you know this is not a sales pitch is really deep is, is really the qualitative side. I mean we do quantitative you know performance analysis and so forth but it's really understanding the decision makers, the investment process the the culture of the firms etcetera, etcetera and and that takes a lot of time but stepping back. We we believe in an index approach is a very sound way and certainly a sound approach to achieve one's long term investment goals. So I'm not trashing index investing at all. I think we do believe and if you look at history there is you know statistics that suggest less efficient markets do create more opportunity, less efficient meaning they're not as you know they're not 80 analysts looking at Apple and. You know that's US large cap is pretty efficient so emerging markets smaller Midcap international do provide more fertile opportunity set but you have to pick the right managers. I'll I'll say you know there are also periods again we we believe history shows cycles are inevitable in in financial markets in manager performance in asset classes. I mean it just you have to you know how would Howard marks you know is a great. Educator on this, but the importance of cycles and how that usually screws with human behavior. So there are periods where the again the environment is is more fertile for good active managers and you know as we referenced the period where interest rates are at zero percent is clearly a certain environment for it. Maybe long term growth, investors valuation didn't matter people were discounting profits you know 50 years in the future at 0%. And so with rising rates we think that is one piece that's going to provide more opportunity maybe level the playing field for non market cap weighted investors. On the international side, my final comment, we spoke about EM and some of those opportunities at one other point, you know the Baron EM found has 26% in Indian companies. They believe really tremendous long term 10 plus year opportunities, the index is at 16%. So if they're right. Big if, but if they're right, you know that's a huge opportunity where they see India moving way, way up, developed international, I'd say the value, you know, let's just the value side of the spectrum. Again, it's been an underperformer. We speak frequently with David Harrow who's Oakmark global, one of the funds we own in our portfolio. We've been investing with Harrow back since the early 90s. You know, he. He's saying that the the valuations of quality businesses that they own in their portfolio are at some of the largest discounts relative to his 30 year history that they've seen not as deep as you know 2008, 2000s but among again some of the cheapest valuations for high quality companies that have just been tarred with the Europe sucks Europe, why would you want to invest in Europe blanket so this macro view the US is the place to be. Yes it has been. US has great companies, the most innovative, the highest growth tech etcetera, but great businesses domiciled in Europe are still very cheap for the earnings growth and value you will get. And so EM we think across the board, international value in particular and you know run focus on a concentrated portfolio, you're going to pay for active management in the higher fees get active management you know don't have a closet index and be. You know, just basically getting index performance. So there's a lot of value in the core satellite, you know, indexes your core and pick your spots for active and we think generally outside of the US is a good spot for active. You know, this actually plays really well into the Ryan portfolio solutions, what advisors typically do in our platform. Of course, we have a 3 mandate approach and two of the mandates are beta strategies that are basically using passive strategies and then active mandate. And usually this is a generalization, but kind of the typical portfolio splits it 5050 between the two. So this is a nice recipe that kind of fits that generalization or platform. I have another. Question here. So, well, first of all, Frank, you mentioned something earlier which I think might change some of my own presentations. You had that comment about valuations, rainfall and GDP growth. So I'm going to follow up with you on that. I'll give you credit in my future presentations on that. So thank you for that little nugget. That was great. I'll try to find I think that slides, I don't know if we've updated. I'll see if I can send it over to you. That is which way does it work now because it's raining here in California and which way? I think one thing that you guys have highlighted, which I think is really important, I think it's actually a really important thing about our whole profession as well is obviously professional investors when they build portfolios, they're using expected returns or capital market assumptions wherever you want to call it. But the reality is a lot of portfolios are built looking backwards, looking at historical returns and of course just think in our industry mostly when people are looking at proposals. They're looking at historical returns. They're not putting expected returns. You know, that's probably one of the biggest reasons for the behavior gap, why many investors trail the benchmarks and you know, investor returns are lower than investment returns. How do you guys handle that? I mean how do you handle the battle just going against historical returns? You've talked about it a little bit, but you have any like like secrets on like really effective in dealing with the battling historical returns, Frank? The the yeah. I mean a couple things. I mean it comes up a lot for us. I I think there's some some real easy corollaries. You can always say you know a 5 star or however many stars you get with Michelin or U.S. news and World Report like you know Princeton, Harvard, Stanford. They're not going to they're not going to suddenly be the the thousandth university in the country next year like they're they're probably going to remain where they are. Like most most things it works right. And we talk about human behavior. Those things that worked for the last five to 10 years you're going to assume Oh well they worked for 5-10 years they'll work going forward but I think you know investing is is often quite the opposite of that and so you know it's it's hard because you you but you do have to get in and and we find you know some of these charts I showed today you really just have to get in with people and say look you know you you can't base everything on on what has done well because. You know if you look back 5-10 years that we you know would coming into some of these time periods you know the US was not doing well like international was crushing it through most of the the early 2000s until 2008 happened. So you know a lot of it is time period dependent. I think reminding people things are time period dependent. I think you know Jeremy mentioned it and I think that's to me and and you know we we are actually have a lot of active management we believe in active management. I think the thing that that the value that active management can bring is, is it a human. Who understands how cycles work can actually make a determination about that and say, hey, I think things are going to go differently over the next three to five years than they have over the past five. They can read, you know, they can do a real qualitative assessment and make determinations about that that you're just not going to get if you just look, look backward very nonchalantly. But you know, it's a, it's a struggle. I say we really struggle with it on the international side. And quite honestly like we couldn't engage too many people in the conversation about international equities until the fourth quarter happened. And now people are like Oh well now I want to talk about it. It's like yeah well now it's it's performing again we but we tried to talk to you about this year and a half ago so it's hard but I think showing people how cycles change how things turn over and and continuing to to kind of bang the drum on that really helps. Great thanks. Do you have any secrets. It's hard. We all battle This is why I'm a research guy and but. No no secret you know I I think we all know that you know people learn and digest information differently and then you know I'm I'm I've come to realize I'm not representative of I'm not like the typical person you know but because for me looking at charts I I but I do believe that the historic trying to just some basic education knowledge of of history of financial markets and and really this cycle so I I agree with Frank you know some key charts to just. Remind people that it the past 10 years hasn't always been the same and then trying to explain why you know and but that's what works for me. Yeah. Do you know I need to jump in actually you're talking cycles here actually a chart I have not seen but I bet it's great this just very anecdotal because I I've seen data over the years and it's sort of the the typical allocation to non-us stocks by US based investors over time. Now I'm going off recall here but like in the late 90s for instance when US was dominating non-us. Became very cool to not have international because you were getting all your international exposure from USUS based companies that got a lot of revenues overseas and so off. Recall the Allocation International was like single digits, even low single digits and then obviously international outperformed for years and then it crested right before US outperformed. So there's that that cycle of international allocations by US based investors. Have you either seen one of those charts before? I bet Vanguard could create one. Yeah. No, we have one. I mean we, you know I see when we look back, you know, we're sitting 40% international today, but in you know 2010, 2011, we were 80% US, 20% international and then we moved, we went 7030 in 2013 and then we went all the way to 6040 in 2015, but we were 8020 because that's where the investor preference was. And and I would argue to your point Rusty investor preference depends a couple different ways to look at it but. Is is really hovered around that point for a long period of time. It's pretty rare to see we have a group that consults with with advisors on their portfolios there most people are sitting at about 75% US so it's it's been there doesn't seem to move dramatically and and this this big run by the US markets if anything it probably was was lower US and then turn around went back the other way over the last you know three to five years. Yeah. Well, we only have a couple of minutes here. I actually should have booked this longer because I have more questions for you guys. I'm gonna have to do phone calls with you afterwards. But one more question came in from a listener and I guess it's going to be a quick yes or no sort of answer given our time constraints. But they're asking about China, but they want to compare and contrast it versus India. So I guess Jeremy, you're the active manager. Do you have a view China versus India in your portfolios? Yeah, so we, you know that's the level of. Micro analysis, we don't, we don't forecast India stock market return. So I you know I mentioned an investor Michael, Michael Cass, his team at at Baron EM, they are extremely, extremely bullish. I I can't even understate on India, it's been a strong market relative to other EM's. They have a again a 26% allocation there but but they emphasized you know Baron has a long term growth approach. They emphasize that sorry that it's not a you know India is is expensive now. So that was my comeback. Why India looks about you know overvalued value guy and they're like it always looks expensive. It's not a short term, but in terms of the it's going to benefit from the move moving away from China as a manufacturing hub. It's going to benefit from friend shoring right. You know it's more aligned with the West and it's got a growing population and educated population. It's these are all points that have existed. But he the final point was the administration, current administration, Modi from an economic policy perspective he said has done extremely positive things. They reformed the tax code, made the real economy, the under you know the underground economy cash base has been kind of wiped out by basically they they restructured regulations and and the currency. So again they have to be right but I think. You know that makes that resonates. You want a a, a country that's you know positive about capitalism and private enterprise. India has its own problems that we all do. But I'd say, you know over 10 year period India is likely to surpass China excellent in returns. I think we've got an answer. Thank you. We got an answer. Well, awesome. I think this is one of our tastiest recipes yet of course I have my bias too. I I love globally diversified portfolios and I've been kind of with you guys last couple years, but I think the argument is pretty compelling now. So I definitely thank you for your time. And Speaking of tasting portfolio recipes, next month we have the custom indexing portfolio recipe on April 20th, so you can register now for it. Again, thank you for your time and trust and Orion portfolio solutions and we will talk to you next month. And thank you again, gentlemen. Thank you. Thank you. Bye, bye. _1701428050368