November 11, 2013

Global Investors Need New Map: Capital Group

Time to focus on companies' export markets rather then their home base, says Rob Lovelace of American Funds

Using corporate headquarters as a starting point for where companies do and grow their business is “increasingly out of step with today's global economy,” according to analysis performed by Capital Group and presented Monday at Schwab’s Impact 2013 conference, taking place this week in Washington.

“The world has changed, and the investment industry needs to change with it,” said Rob Lovelace, director of Capital Group and a portfolio manager of the widely held American Funds, in a statement. “That’s why we’re bringing ‘The New Geography of Investing’ to the forefront. The New Geography of Investing looks at where companies generate their revenues rather than where they’re domiciled when evaluating their prospects.”

For example, investors may consider the Standard & Poor's 500 index to be an American index, since its member companies are based in the United States. These companies, though, generate nearly 40% of their revenue outside the country.

Looking at the MSCI All Country World Index, Lovelace says, emerging markets represent only 11% of its composition by market capitalization, but 34% by economic exposure. The U.S. accounts for 46% of the index, but only 27% of demand.

“Investors in a portfolio modeled on the S&P 500 might not get the U.S. concentration they’re seeking and MSCI ACWI investors might not get the global diversification they want,” Lovelace said.

He also points to a company like Burberry, widely thought of as a British firm. Yet, just 25% of its sales are reported within the U.K., while 33% come from China and other emerging markets.

“Do you want to participate in a potential European economic recovery?” the portfolio managed asked. “If so, you may want to consider investing in a global employment agency that gets 64% of its revenue from Europe but is headquartered in the U.S.”

Lovelace says it’s not just investors who need to think differently. Professionals in the investment industry should, too.

“All of us in the investment industry need to re-evaluate our approach,” he noted. “We’re trying to help people reach their individual objectives, so we need to align our decision-making with that rather than being confined by a geographic index. Indexes can still be useful in judging an investment manager’s results, but investors need to be aware of their limitations when it comes to asset allocation and security selection.”

Several years ago at a Morningstar event, this reporter asked PIMCO’s Mohamed El-Erian about whether or not U.S. investors were diversifying their portfolios enough, given the increasingly global nature of business. His response, “Having U.S.-based multinationals in a portfolio is giving you global diversification through their high level of exports.”

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