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November 11, 2013 at 12:20 PM
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.
