For as long as I have followed Vanguard Group founder and former CEO John Bogle, he has never embraced investing in foreign stocks. “I wouldn’t invest outside the U.S.” he said during an interview with Carla Fried for Bloomberg Business. “If someone wants to invest 20 percent or less of their portfolio outside the U.S., that’s fine. I wouldn’t do it, but if you want to, that’s fine.”
This isn’t a new position for Bogle. He has been lukewarm on foreign stocks for decades. I don’t agree with him, and neither do most advisers. The data shows that allocating 20–40% in foreign stocks has provided a diversification benefit in long-term portfolios. That being said, Bogle’s viewpoint is worth exploring because it leads to an interesting discussion about revenue generated by S&P 500 Index companies – specifically the revenue earned from their overseas operations.
Many US corporations do significant business overseas. According to S&P 500® 2014: Global Sales data, the percentage of S&P 500 sales from foreign countries increased in 2014 after five years of stagnation. The overall rate was nearly 48% in 2014, up from around 43% ten years ago, as illustrated in Figure 1. While a roughly 2% increase isn’t huge in the grand scheme of things, it indicates that foreign business has at least remained alive and well among S&P 500 companies.
Figure 1: S&P 500 Foreign Sales as a Percentage of Total Sales
Source: S&P 500 2014: Global Sales; Howard Silverblatt, Senior Index Analyst, Chart by R. Ferri
To Bogle’s point, sales of US goods and services to foreign countries have a significant spillover effect in the US equity markets. Growth overseas parlays into growth for US multinational corporations, and news of slower growth has the opposite effect. A sizable portion of foreign sales are conducted in foreign currencies providing US-only investors with exposure to currency diversification.
So is it necessary for US investors to directly own foreign stocks given these exposures? Bogle’s point appears valid from a foreign revenue perspective. However, before deciding, let’s dig deeper into where the foreign revenue is coming from. We can start by looking at the countries generating foreign revenues and measuring how much business we do with each. The S&P 500: 2014 Global Sales report does not have complete data on this because not all companies break down foreign sales by country. Table 1 is a summary of foreign revenue by region from the data that is available.
Table 1: S&P 500 Foreign Sales by Region from 2012 through 2014
Source: S&P 500 2014: Global Sales; Howard Silverblatt, Senior Index Analyst, Table by R. Ferri
Revenue from foreign sales appears to be well diversified globally. We can see that Asia and Europe each make up at least 7.8% and 7.5% of S&P 500 sales, respectively, and this could be much higher because 22.2% of reported foreign sales are not broken out. This data also supports Bogle’s view that a US-only portfolio may be adequately diversified internationally.
The S&P 500: 2014 Global Sales report also provides data on the industries that make up foreign sales. Here we find a mixed message. Some industries have broad global distribution and others are more localized. Technology, energy and materials are easy to export and have the highest foreign sales as a percentage of all sales. Financial services, consumer staples and probably basic utilities have more localized businesses. Figure 2 provides insight into the industry breakdown.
Figure 2: Foreign Sales as a Percentage of All Sales for S&P Industry Groups
Source: S&P 500 2014: Global Sales; Howard Silverblatt, Senior Index Analyst, Chart by R. Ferri
Industry diversification is where Bogle’s view on forgoing direct foreign stock exposure may break down. Some industries can export more easily and other industries do not have that benefit. Electric utility companies are constrained by local electric utility and are a prime example of a home bias. A direct investment in foreign stocks would round out a global portfolio by including foreign companies with localized industries.
John Bogle doesn’t embrace direct ownership of foreign stocks while I believe there is a worthwhile diversification benefit to owning them. It appears we’re both right in some respects, and perhaps it matters little in the grand scheme of things. Only time will tell. I’m putting information on the table so you can make a more informed investment decision for yourself.