US equities have substantially outperformed non-US-developed equities since the beginning of the financial crisis, which has lifted the US share of the MSCI World Index to a 40-year high.
The performance of US versus non-US tends to move in cycles, and we would not be surprised to see it swing back in favor of non- US equities. Non-US equities have better intermediate-term earnings growth prospects and trade at more attractive valuations. The dollar also appears exposed over a longer-term horizon, which could give a further tailwind to non-US equities in common currency terms.
Mercer’s house view is that developed public equity allocations should be implemented through global equity mandates, leaving country allocation decisions to active equity managers.
Many active global equity strategies have underperformed in recent years due to an underweight to US equities. Investors should be wary of the temptation to switch to active strategies that have performed better simply due to a higher weight to the US.