Rise Advisors Portfolio Updates
Rise Advisors Portfolio Updates
February 26, 2025
Transcript Below
Hi everybody, good afternoon. This is Zach Harrington from Rise Advisors and on behalf of Mark, Stephanie, and the whole team here at Rise, I want to thank you all for taking the moment to watch. It will hopefully be a quick market update. We just wanted to get this video out to everyone as you'll start to see trade confirmations rolling through your account. We wanted to talk through what ended up being a pretty material change in how we got to making this decision.
So, when we look at what we're going to talk through today, I want to provide a quick history on what's known as modern portfolio theory, kind of how portfolios get constructed, things we've done throughout RISE over the last five years. And then what led to our decision to remove international exposure for client accounts across the board.
So just to provide a quick history: modern portfolio theory, we'll use the acronym MPT was a Nobel Peace Prize winning piece of research written in 1952. It won the Nobel Peace Prize in 1990. Super high level, 'cause it doesn't apply to many of you, but it's just how most professional investors are taught to allocate investors' portfolios is that you basically need to diversify across asset class: stocks, bonds, alternatives, cash. You need to diversify across market cap, have small cap, mid cap, large cap companies, and then geographic regions. In theory, having exposure to Asia and having exposure to the US and Europe, so on and so forth. Most asset allocated portfolios where most investors encounter these are both in their portfolios through RISE, but also for example, in your target date funds through your employer. What you'll traditionally have seen in these asset allocated portfolios is about a 60/40 waning of US stock to international stock. For example, in a 50/50 portfolio, what you'd end up seeing is basically 30% exposure to US equities and 20% exposure to international equities within that 50% bucket.
At RISE in November of 2021, we had already made a decision to be different than the industry and it was a great decision, and we'll get into kind of what it's looked like over the last decade or so. But in November of ‘21, we lowered our exposure to basically 85% US equities, 15% international, which was a pretty large shift away from where things were. You know, within like the modern portfolio theory umbrella. So, we saw Covid shutdowns continuing throughout Europe and China and the impact that was going to have on those economies, the geopolitical risks of China and Russia. And this was pre-Russia's invasion of Ukraine, but this was leading into those Olympics that were taking place in January and February of 2022 and led into what ended up being the invasion of Ukraine. On top of that, there was just slow growth and lack of innovation throughout these zones and US had really outperformed for quite some period of time. So we do all of that to say that we've now made the decision to basically reduce that 15% down to 0%.
And so, if we go and look at kind of why international has been such a large piece of asset allocated investors portfolios, we need to go back to 1970. This chart here is called a relative performance chart. So this line right here, one means there's parody that the indexes are performing in alignment with each other. Anytime the blue line goes below one, it means international outperformed the United States. And anytime the line goes above one US outperformed international. So what's really important to keep in mind with this is what we experienced basically from 1970 through the start of the nineties was the outsourcing of our industrial process and manufacturing. A lot of companies, some of which you all have worked for the Xeroxes of the world, the GEs of the world, the IBMs, the Kodaks, all outsourced, their labor abroad and a lot of these developing countries and European countries as they built out their industrial manufacturing process really outperformed the United States.
In comes the early nineties and what ended up being the Clinton administration. The Clinton administration did a couple of really great things throughout the nineties, they implemented tariffs and they began to kind of punish companies that had been outsourcing labor. They also created some free trade agreements, the generation of NAFTA, all of these other things. And then basically from the onset of 2000 through the end of 2024, the US has gone on a 25-year run of pretty strong domination. Now, what has led to this technology, healthcare and the main thing being technology as a whole, the US has been the dominant manufacturer of hardware, software, technology, innovation. When you look at the largest companies on earth, they are predominantly US tech companies.
When we look at this chart and we look at this kind of dividing line right here of pre-2000 international outperformed because of outsourcing of industrial manufacturing and industrial process. Post-2000, technology and healthcare have dominated, which of those are more likely to repeat themselves? I think when we look at it right now, if anything, we would start to see more onshoring of our industrial manufacturing and processes. Within the last week, you've seen massive announcements by Apple, by Eli Lilly, and a bunch of other major corporations to begin bringing manufacturing back stateside kind of in the face of some of the tariffs that we're experiencing. On top of that, when you look at AI innovation, tech hardware, tech software, it really seems to be a US dominance that should continue. So we expect it at a macro level to kind of be on the same path that it’s been on.
So then we look at it and say, “okay, if we're still going to own international because we're worried that the past might repeat itself,” we have to look at it and say, “okay, are we actually getting in a diversification by owning it?” And so one of the ways to look at diversification is looking at correlations, how closely tied are return patterns among investments? Meaning how much of one investment's return can be associated with another's.
And so if you look at this, these are five ticker symbols that you should be pretty familiar with. First is developed international, actively managed. The second is developed international, the index. The third is the emerging markets index, the fourth is the S&P 500. And the fifth is an emerging market actively managed. What I want to focus on are numbers one, two, and three. When we look at where these three numbers come into play, what this tells us is essentially a correlation of 0.9. There's no statistical difference or diversification when it comes to how the performance of those or the relationship of those return patterns behave. So, you're not actually getting very much diversification on top of that.
It's important to know we're looking at a 10-year period of time here. It's not like we're looking at six months. It's not like we're looking at six years, that’s a full decade of data. So if we know these assets are heavily correlated and per the behavior of the holding is based on the others, it then comes down to risk and reward. So are we gaining anything from a risk reduction standpoint or a return increased standpoint by owning these international assets?
So, this risk-reward scatter plot, this orange line and black box rate here represents the S&P 500. So if we go back and we look at the last decade, the end of 2014 through the end of 2024, the S&P 500 has averaged just about 13% a year with a standard deviation or risk measure of about 15. As we move down the y-axis that represents return. And as we move across the x-axis, it means risk. And so the further something goes out on the x-axis, the more risk it has brought into the portfolios, the higher it goes up on the y-axis, the more return it's brought to the portfolio. And so these two dots right here are developed international Europe and Japan essentially. And although they've basically brought similar levels of risk, they've brought in almost 10% a year, less return over the last decade than US equities, let alone we come further out on the X-axis. And we look at emerging markets. All emerging markets have done is add additional risk into the portfolio. So if we don't expect the macro behavior to continue, correlations are super highly tied together and all they seem to be doing is adding standard deviation over a decade period of time, we then need to look at if we should even own these.
And so we then began to look at, and this should be a slide familiar from the video we sent out in January, this is looking at the creation of new public companies in the 21st century, so last 24 years. And it's also looking at basically the innovation behind it. Why has this behavior happened? Why have, for the last decade, international equities underperformed by anywhere from seven to 10% a year? Well, in the 21st century, the US has had about 220 companies go public and those companies make up about $18 trillion in market cap. These are some very familiar names, Alphabet, Meta, Tesla, Netflix, Salesforce, so on and so forth. The European Union has had about 65 companies go public representing about $2 trillion in market cap. Sure, the US has had about three times the amount of companies go public, but those companies represent nine times the amount of shareholder value. And when you look at Europe's dependent on Russian oil and natural gas and their lack of ability to get away from those high energy prices and aging population and a kind of socialistic government type that really pushes, you know, labors and a lack of labor productivity, let alone the monetary policy where you have these countries like Germany and the UK that support lesser kind of fiscally responsible countries like Greece and Italy. It creates a very tough environment to be pro-innovation and pro-growth. So we think once again, these behaviors of these companies should persist further than these.
Then the bigger question also becomes, if we're going to take the chance and we're going to remove international exposure, well, the US economy is only, let's call it 400 million people. It's representative of something in the ballpark of like seven or 8% of the world population. How are we assured that we're still going to get access to these markets if we don't want to own those companies or have direct exposure? So when we look at the S&P 500, which most of you own through a number of different ticker symbols, your Vanguard Value Index, your Vanguard Growth Index, Fidelity Total Stock Market, the energy sector, the financials sector, the industrial sector, you have exposure to this index one way or another.
When you look at the revenue of these 500 companies, 41% of that revenue from the S&P 500 comes from abroad. So once again, if at the macro level we don't anticipate the theme to change of basically offshoring industrial process versus a lack of US tech dominance, we don't expect that to happen. On top of that, you look at the fact that there's high correlations, higher risk and standard deviation for less return in international markets, a lack of innovation and 41% of the earnings that come, or excuse me, revenue that comes from the S&P 500 comes from abroad, we think that we're better off taking a domestic bias of a hundred percent and letting those US companies that tend to be higher quality, better accounting standards, so on and so forth, lead the charge for global growth. So as of this recording is Wednesday, February 26th at around 1:45 PM the trades have been completed in your accounts, you will see those trade confirmations.
And once again, for almost everybody on this video or who's watching this video, you basically got out of international and you bought some sort of proxy of the S&P 500. When it comes to this concept, these ideas, anything like this, these are things that will be reviewed in your review meeting over the next handful of months. I just wanted to get a video out in advance if you had questions or wanted to understand the why. You knew the why. So as always, if you have any questions, I'm here. Mark's here, Stephanie's here. We want to thank you for taking the time to watch this video and thank you for trusting Rise with your life savings. If you have any questions, I'm here and have a wonderful day. Thank you so much all.
Sources
1.Y-charts –relative performance MSCI USA vs MSCI World since inception
2.Morningstar advisor workstation –10yr correlation (SPY
3.Morningstar advisor workstation –10yr risk Reward Scatter Plot (SPY
4.https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/the-alchemists-amv.pdf
5.Torsten Slokgood morning briefing 1/23/25 -Apollo
This presentation is for Informational purposes only.
All investment strategies including rebalancing and diversified asset allocation have risk. Past performance of our investment approach, component holdings and methods does not guarantee future results. Advisory services offered through Rise Advisors, LLC ("Rise") Registered Investment Advisor. While all data is believed to be from reliable sources, accuracy and completeness are not guaranteed.