Where is capital flowing?

In my practice, I see a lot of investment portfolios that are managed by professionals. The basic portfolio is apportioned ("allocated") mainly between stocks ("equities") and bonds ("fixed income securities"). There are other allocations in most portfolios today, such as, for example, real estate and commodities, but I would like to talk about the "equity" portion of the portfolio, which is usually a very large portion, sometimes 60% or more, depending on the objectives (and the risk tolerance) of the investor.

Over the last 30 years, I have seen the equity portion move from investments mainly in US "large cap" stocks to a situation now where at least half of the stock portion is allocated to overseas stocks. Of the overseas stocks, which were initially European and Japanese stocks, an increasing portion over the last 25 years or so has been allocated to "emerging markets," that is to stocks from China, India, Brazil, Thailand, and so on. (Actually, China, India, and Brazil are no longer considered "emerging" in many portfolios. Those countries are prominent, of course; they are now considered to have "emerged.")

Initially the reason I heard for stock investing overseas was "non-correlation." That is, the stock prices, say, in Tokyo generally would not correlate with the stock prices on the NY Stock Exchange. Thus, when our market was down, Japan's market was up, and the volatility of the portfolio was dampened as a result (which is a good thing). But that reason for investing overseas has pretty much gone by the board as we have moved into a more-or-less single, one world market place.

Now one invests overseas because one is likely to get a better return, even when adjusting for risk. I never quite made the connection between the amateur-investment-policy-observer part of me and the amateur-economist part of me until this post from Instapundit. People are increasingly going overseas with their investment dollars because they are finding economies there that favor a better return. In other words, you can get more for your money outside the US. That's pretty sad.