There is a post by Dennis P. Quinn Hans-Joachim Voth – good Finance professors both of them – on why international diversification does not seem to deliver the benefits that were expected. They argue that globalisation has made everything more correlated.
I think they are spectacularly wrong.
Obviously the good Professors are not Icelandic.
I enjoy all those mathematical models that suggest that if it is correlated it is not diversified. But day-to-day correlation is not where it is at. What you really want is “uncorrelated in a crisis”. International diversification is pretty good at that.
Now I am going to give you an Australian perspective.
In other words
If you are an Australian and you diversify globally but swap the currency back to Australian dollars (as one well known retail fund manager does) you are also failing to diversify. The main advantage of diversification internationally is that it removes the country specific catastrophe risk and swapping the currency back is simply insane. Indeed an Australian retail international fund that wants to swap all the currency back is putting marketing ahead of client asset protection and is – in my view – almost criminally negligent. Just think how an Icelandic international fund would look if it had swapped its currency exposure back to Kroner! They would be a wipe-out because they would have to sell their valuable international assets to meet their obligations to deliver valuable foreign currency for worthless Kroner.
But what is good for an Icelandic person or an Australian (some global diversification fully accepting currency risk) is good for an American too. The
And there is a small chance that the
The dear Professors have this wrong. International stocks are correlated but not entirely and not in extrema. Rich people in small Latin American countries know this. Maybe the good Professors should too.