In today's world of economic turbulence and heightened uncertainty, investors are increasingly focused on how to preserve and grow their assets. A recent study has revealed an exciting and practical strategy: successful U.S. mutual funds have improved investment returns by increasing their allocation to foreign stocks listed in the U.S. (cross-listed stocks) as a way to navigate economic uncertainty. This strategy is not only effective for professional investors but also offers valuable insights for individual investors.

Economic Uncertainty: Challenges and Opportunities for Investors

Economic uncertainty—particularly that caused by government policies—has always been a crucial factor influencing investment decisions. Changes in government policies, adjustments in central bank interest rates, and other policy shifts can directly impact market performance. To address this, researchers have utilized the Economic Policy Uncertainty (EPU) Index, which measures uncertainty by analyzing economic news, policy fluctuations, tax policies, and more. When the EPU index rises, economic unpredictability intensifies, presenting both challenges and opportunities for investors.

Mutual Funds’ Smart Move: Investing in Cross-Listed Stocks

The study found that U.S. mutual funds respond to economic uncertainty by increasing investments in foreign companies listed in the U.S., commonly known as American Depositary Receipts (ADRs). This approach helps fund managers effectively diversify risk.

Imagine you have a basket filled with balls of different colors. If the basket consists solely of red balls (symbolizing U.S. stocks), variations in their performance may subject you to considerable risk. However, if the basket includes balls of various colors (representing foreign stocks), even if red balls fluctuate, other colors may help balance the risk. Mutual funds achieve a similar effect by investing in foreign stocks.

The research indicates that when U.S. economic policy uncertainty rises, fund managers tend to increase their allocation to cross-listed stocks. For example, as the EPU index climbs, mutual funds allocate a higher proportion of their portfolios to these foreign stocks. Though this adjustment may seem minor, it significantly enhances risk diversification and helps funds achieve better returns in uncertain economic conditions.

Why Choose Cross-Listed Stocks?

Why not invest directly in foreign markets? While direct foreign investments provide global exposure, cross-listed stocks offer several distinct advantages:

1. Convenience – Cross-listed stocks are traded on U.S. stock exchanges, eliminating the complexities associated with direct foreign investments.

2. Transparency – These companies must comply with U.S. regulatory and disclosure requirements, ensuring that investors receive sufficient information.

3. Regulatory Protection – Investors benefit from the same legal and regulatory protections as they would when investing in U.S. companies.

4. Liquidity – Compared to direct foreign investments, cross-listed stocks generally offer better liquidity.

Does This Strategy Really Work?

Research data suggests a strong correlation between this strategy and improved fund performance. During periods of increased U.S. economic policy uncertainty, funds holding a higher proportion of cross-listed stocks tend to exhibit more stability. Additionally, an investor who adjusts their portfolio at the beginning of each quarter—buying funds with the highest allocation to cross-listed stocks and short-selling those with the lowest—can achieve an annualized excess return of 3.4%. While this may not seem like a large figure, in the investment world, such an advantage is significant.

Other Investment Strategies：

Beyond increasing exposure to cross-listed stocks, investors can also adjust their asset allocation in response to economic conditions. For example, they can increase holdings in bonds, preferred stocks, and other non-equity assets to maintain portfolio balance in uncertain environments.

Think of it as preparing a well-balanced meal:

Domestic stocks act as the main course,Cross-listed stocks as vegetables,Bonds as the protein source, and Other assets as fruits.When economic conditions change, adjusting the proportion of these “ingredients” ensures a healthier investment portfolio.

With global economic integration accelerating, cross-listed stocks are likely to play an increasingly important role in investment portfolios. Individual investors can periodically review their portfolios and adjust their asset allocation based on global economic trends. By doing so, they can better navigate economic uncertainty and uncover valuable investment opportunities in volatile markets.