Growth investing in international stocks is very different from growth investing in U.S. stocks. The tracking error between international growth and value returns has been significantly lower than the tracking error between U.S. growth and U.S. value returns. Therefore a portfolio consisting of both international growth and international value equities, as defined by EAFE, has offered less portfolio diversification than a portfolio consisting of both U.S. growth and value equities. An alternative strategy is an international growth portfolio with substantial investments in small-capitalization and emerging markets stocks, two asset classes that offer the potential for higher returns than the MSCI EAFE Growth index, with lower correlations to the MSCI EAFE Value index.
