6 Lessons Netflix Can Teach Us About International Investing By: Greg SeaverCIMA

Diversification is vital, yet the average investor may be too heavily invested in US equities.

Remember when Netflix infuriated customers by trying to phase-out mail-in DVD’S in 2011? In the decade since, Netflix evolved into a digital entertainment powerhouse. After hooking us on binge watching, Netflix realized it was unsustainable to rely solely on content from other providers, so they began diversifying and creating their own content, too.

Know what else stands out about 2011? That was the last time international equities outperformed US equities, which, like Netflix, have dominated for the last decade.1 However, it may be unsustainable for investors to rely solely on continued US dominance, which may face challenges going forward—especially while international equities have become an increasingly attractive opportunity. But like DVD loyalists, it may take a little convincing to make the change.

Since Netflix was able to change how we view TV, we thought they could teach us a thing or two about shifting our investment mindsets, too. We think the following six lessons, paired with original Netflix hits, explain why it’s time to consider increasing your portfolio’s international allocation.

Lesson #1: Concentration Can Only Carry You So Far

The first season of the thriller “Bloodline” won over fans and even earnedEmmy nominations, but the subsequent seasons failed to live up to the hype. As entertainment-guide Rotten Tomatoes summed it up: the “final season offers disappointing proof that a stellar cast can only carry a series for so long.”

For investors, a stellar cast of just five companies —Facebook, Apple, Microsoft, Amazon, and Google/Alphabet—has been driving an outsized portion of US outperformance. How much longer can these stars carry the plot? International equities, on the other hand, are much less concentrated.

Lesson #2: Be Ready for Change

“Orange Is the New Black” not only centered on the lead character adapting from a comfortable upper-middle class lifestyle to life in prison, but was also widely acclaimed for shifting viewer perceptions by humanizing prisoners and covering serious topics such as race and inequality in engaging ways.

It may be time for investors to shift their perceptions, too. Growth-centric companies (think Lesson #1) were thriving pre-pandemic, when the global economy was slowing.

But cyclical sectors, which have historically driven growth during economic recoveries, stand to benefit as demand ramps back up and the global economy accelerates.International indices tend to be far more heavily weighted than the US.

International indices tend to be more heavily weighted to cyclical sectors, which stand to benefit as the global economy accelerates. 


Lesson #3: Know Your Worth

Netflix regularly increases their subscription price without losing viewers because they know (and deliver) what people want. For example, shows such as “The Crown” feed both our curiosity about the British royal family as well as our collective obsession with celebrity lifestyles.

But are investors getting their money’s worth at home? US equity prices may be fi t for royalty, which could make it more difficult for companies to continue replicating the sky-high growth they’ve notched in recent years.

On the other hand, international stock valuations are below their historical average, which suggests there maybe greater room to run—and that they may be at a good entry point for long-term investors.

Lesson #4: Think Ahead

Netflix even influences which topics are cool; this now includes chess thanks to “The Queen’s Gambit.” Even those who have never played chess were intrigued by how professional chess players can win by visualizing the game several moves ahead.

It’s impossible to time the market, but sometimes there are hints at what’s coming. A weakening US dollar maybe a clue: A declining dollar can favor international equities and has tended to correlate with international outperformance.

Additionally, chess moves often involve calculated risks: sacrificing pieces for a subsequent advantage. The US outperformance cycle has lasted well beyond the average of 7.7 years; this has likely resulted in many investors having concentrated allocations to US equities.

For example, without rebalancing, a 70% US equity/30% international equity allocation at the start of 2010 would have shifted closer to 84% US/16% international today.2 That may leave many portfolios subject to much more risk relative to the potential.

Many portfolios could be overweight US equities, potentially subjecting investors to higher risk than intended.


Lesson #5: Look Beneath the Surface

Netflix has also expanded into reality game shows such as “The Circle.” Contestants in isolation communicate solely via social media, trying to win everyone over as themselves—or by making up a persona they think others will like. In other words, appearances aren’t always what they seem.

Though the US has outperformed overall for the last decade, this dominance isn’t entirely what it seems, either.

On closer examination, many of the top-performing businesses in the world already are international companies—and have been for years.

The US has outperformed overall over the last decade, but not on an individual company basis.


Lesson #6: Go Beyond US Borders

In 2020, Netflix’s subscriber base surpassed 200 million for the first time, with nearly two-thirds of its customers outside the US and Canada. This international growth has been bolstered by producing regional, non-English shows. To date, the French-language heist series, “Lupin,” has been one of their most successful shows ever in multiple countries, including the US.

The lesson here is that there’s a lot of world—and a lot of opportunity—outside the US. In fact, there are 4x more publicly traded international equities than US equities. While many companies in the US are growing via mergers and acquisitions, new international companies may betaking root as they meet changing demographic demands or solve for new societal challenges.

Additionally, it’s predicted that nine out of 10 of the next billion consumers will come from Asia,3 where a vast group of newly middle-class consumers is ready to fl ex its purchasing power. The region already accounts for 51% of the world’s publicly traded companies as of 12/31/20.This projected growth presents an enormous opportunity, particularly for professional active managers with the resources to research foreign companies and markets.

 

Putting It All Together

In short, while a heavy US equity allocation has benefited investors over the past decade, it may not continue doing so going forward. But outperformance is relative, not a zero-sum game, which is why being properly diversified—the overall lesson Netflix has taught us—can be so critical.

So what level of international diversification might make the most sense for long-term investors? To find the optimal balance between risk and reward, i.e., the “efficient frontier,” we reviewed US and international equity combinations from 100% US/0% international to 0% US/100% international over the last 50 years.

Investors would have earned the most balanced risk/return by maintaining a 60-70% US/30-40% international allocation, despite periods of international underperformance. Yet a typical US investor has only 15% international exposure, which means investors could miss out if the cycle turns.4 

Though it seemed absurd for Netflix to phase out DVDs a decade ago, we certainly don’t miss mailing those red envelopes back. It’s a great reminder that what meets our needs—whether entertainment or investing—shifts over time. And by realizing a shift was on the way, Netflix has more than proven the benefits of adapting proactively.Today, like the shift from DVDs to digital streaming, we think we’re on the cusp of an equity-market regime change. Unfortunately, many portfolios may be too US-focused to take advantage of it. As international equities look increasingly attractive, investors still have time to potentially capitalize on this shift by improving diversification with a more risk-balanced allocation to international equities.

Talk to your financial professional about finding the right balance of US and international equity exposure for your portfolio.

(1) Bases on monthly returns, the MSCI World ex USA index last outperformed the S&P 500 Index in February 2011. Data sources: Morningstar and Bloomberg, 5/21. Past Performance does not guarantee future results. Investors cannot directly invest in an index.

(2) Morningstar as of 12/31/20

(3) Brookings Institute, "A Global Tipping Point: Half the World Is Now Middle Class or Wealthier," 9/27/18

(4) Morningstar as of 3/31/21

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This communication is provided solely as general information about our products and services and should be considered general investment education.None of the information provided should be regarded as investment advice or an investment recommendation.

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Greg Seaver

Greg is part of the Defined Contribution Investments Team for Hartford Funds. In his current position, he is responsible for engaging and educating retirement specialist advisors and their clients about current and emerging opportunities in the retirement plan marketplace. These opportunities range from...

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