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June 20, 2016 at 08:00 PM
In the bestseller “The World Is Flat: A Brief History of the 21st Century,” Thomas Friedman argued that the world is now a more level playing field than it has ever been in history. As a result, geographic divisions are increasingly irrelevant.
We concur with that assessment and believe that it has ramifications for how portfolios are (or should be) constructed. And we aren’t alone. There is evidence that institutional investors have been of this mindset for a while now, as pointed out in a 2010 study by MSCI Barra that concluded “global equity mandates […] may be emerging as the ‘new classic’ structure for implementing equity allocations.”
While institutions have been migrating away from regional mandates in favor of global mandates, individual investors have been slow to follow their lead. We believe advisors need to help investors increase their adoption of globally oriented strategies.
Consider the data in the above table. Two things are immediately clear from these numbers. First, global equity funds are far from mainstream, with only a 6% market share across these categories. Second, assuming that assets in U.S. and international funds are a good proxy for a typical investor’s equity allocation, there is a large home country bias. The weighting to the U.S. within the MSCI World Index is approximately 59%, so a market-weighted portfolio would have a similar exposure to U.S. equities. However, that is not what we see in the data; U.S. equities make up a disproportionate 80% of the assets in the two categories.
So why do we believe that investors should consider allocating to global strategies? For one, global markets have become considerably more integrated over the last few decades. As a result, industry factors now dominate country factors in terms of explaining stock market returns, a 2000 paper in Financial Analysts Journal found. Additionally, most mid- to large-cap companies now generate substantial revenue abroad. In fact, overseas revenues of S&P 500 companies exceeded 48% in 2014, according to S&P Dow Jones Indices. Where a company domiciles is much less relevant than it used to be.
