International Belongs in the Core: Rethinking Diversification in 2025

Opal portfolio managers Adam Muller and Yang Liu on why advisors can't afford to overlook global markets in 2025

For much of the past decade, U.S. investors have been content to stay close to home. The S&P 500's stellar performance made it easy to ignore international markets, but 2025 has changed the conversation entirely. International markets have more than doubled the S&P 500's returns this year, forcing investors to reconsider their allocation strategies.

The Wake-Up Call

"It's funny how something becomes important when it makes people money," observes Adam Muller, portfolio manager of Opal's international dividend strategy. "For the first time in quite some time, people are asking themselves: should I be exposed to international markets? The reality is a lot of investors missed this move because they became complacent."

This shift represents more than just a temporary market rotation. Combined with questions about U.S. exceptionalism, trade policies, and tariff implications, many investors are discovering they're significantly underweight in international exposure.

Beyond the S&P 500: Understanding Diversification

Many investors believe owning the S&P 500 provides sufficient diversification, but this assumption reveals a fundamental misunderstanding of risk. Yang Liu, who manages Opal's model portfolios, explains the limitation using a compelling analogy: "I always like to use the B-17 flying fortress example. You have four engines. When two of your engines aren't working, you want the other two to jump start and keep the fortress flying."

The S&P 500, despite its sector diversification, represents just one market driven by a single regulatory entity, one currency, and one investor base. More concerning is its increasing concentration risk—the top 10 names, mostly technology companies, now account for roughly 40% of the index's total weight.

"History tells us concentration risk is always underestimated," Liu notes. "Whether it was energy names in the 80s, Cisco during the tech bubble, or financials 15 years ago, no single stock or group of stocks stays at the top forever."

The Multinational Misconception

Some investors argue they already have international exposure through multinational companies like Apple or Microsoft. While these companies do generate revenue globally, this approach has significant limitations.

"Apple may get 17% of its revenue from China, but it's still a U.S.-domiciled company subject to U.S. laws, U.S. Fed policy, and U.S. tariff policies," Muller explains. "If you owned BYD, an electric car company based in China where 90% of revenue is in China, that's going to do way better if the Chinese economy takes off."

Additionally, multinational companies typically hedge their currency exposure, which means investors miss out on potential currency gains that have contributed significantly to international returns this year.

Valuation Opportunities Abroad

Current valuations present a compelling case for international exposure. While the S&P 500 trades at approximately 26 times earnings—near historical highs—European markets trade at around 15 times earnings. "Which is riskier," Muller asks, "buying something at 26 times earnings or 15 times earnings?"

International markets also offer exposure to sectors underrepresented in the U.S., such as European luxury manufacturers, Dutch and Japanese semiconductor equipment makers, and Chinese fintech companies. This sector diversification becomes increasingly important as the number of publicly traded U.S. companies continues to decline—from 6,000-7,000 names two decades ago to just over 3,000 today.

How Opal Approaches Global

At Opal, international is a core component of portfolio construction. Liu's top-down model perspective combines with Muller's bottom-up fundamental analysis to create comprehensive global strategies.

From a strategic standpoint, Opal's latest capital market assumptions predict slightly higher returns for international developed markets compared to the U.S. over the next seven to ten years. This outlook reflects both valuation normalization expectations and the recognition that while the U.S. has enjoyed superior growth, particularly in technology, international markets offer compelling value.

"International developed and emerging markets provide a good hedge from multiple risk perspectives—not just market risk, but concentration risk and inflation risk," Liu explains. "When we talk about risk, we need to look at it comprehensively."

Navigating Complexity

The investment landscape has become significantly more complex, driven by changing geopolitical dynamics, evolving trade relationships, and shifting monetary policies. Rather than creating obstacles, this complexity creates opportunities for experienced global investors.

"As the world becomes more complicated, there are more investment opportunities, but those opportunities can be harder to find," Muller notes. "You need a team experienced in global investing to identify them."

The Bottom Line

International investing isn't about abandoning U.S. markets—it's about helping advisors build more resilient client portfolios that can thrive in an increasingly complex global environment. In a world where traditional diversification assumptions no longer hold, global exposure provides the multiple engines needed to help keep client portfolios performing when domestic markets face headwinds.

As Liu puts it: "International markets are more risky, but you shouldn't be afraid of them. When managed properly with Opal's help, they actually may help reduce risk and smooth your ride over the long term."

For advisors seeking to optimize their clients' long-term returns and strengthen their practice, partnering with Opal provides the global expertise and systematic approach that today's complex markets demand.

ABOUT OPAL CAPITAL

Opal Capital is an investment management firm dedicated to building long-term wealth through a focused portfolio of high-quality, dividend-paying companies. Specializing in OCIO and asset management services, we provide innovative investment strategies that drive financial growth and stability.

Our approach is rooted in discipline, forward-thinking analysis, and a commitment to delivering lasting value. We partner with clients to navigate market complexities, ensuring their investments align with long-term financial goals. To learn more about our investment philosophy and services, visit our website: www.opalinvest.com.