Global Investing 2.0
The turbulent markets of the past decade have given new meaning to global investing. In this paper we explore the contrast between a standard “cut-and-paste” approach and a dynamic real-time strategy that more closely matches the pace and scale of globalization occurring right now.
It’s a big world out there, and it’s getting bigger all the time. If you stack up the world’s stock markets, the United States has gone from dominating 68% of the total global equity market capitalization in 1970 to 45% at the end of 2008. Today emerging markets stocks have a combined market cap of $1.75 trillion—about equal to the total U.S. market cap two decades ago. It seems unlikely that this trend will reverse. The world has changed, and investors must reconsider their strategy in an evolving investment landscape.
Global investing 1.0: a piecemeal approach
The conventional approach to global investing is to allocate a portion of a portfolio, usually somewhere between 15 and 25%, to foreign stocks, with perhaps a dash of emerging markets added in to spice up returns. We would argue that this approach fails to reflect the global nature of today’s markets—not just the market for stocks but those for consumer products, industrial goods and commodities. A discrete non-U.S. allocation generally springs from a top-down—and we think upside-down—view of the world. It assumes that forecasts of regional GDP growth, interest rates, inflation and broad market valuations will result in an effective and rewarding allocation. Getting the big-picture economic view is hard enough. Tying it back to the ever-changing state of global markets is next to impossible.
The real world is dynamic. Markets are growing more linked. Today capital flows freely and information is instantaneous. For instance, European pharmaceutical companies are attempting to revive growth by acquiring American biotechs. U.S. tech companies are reducing costs by shifting operations to Asia. Asian steelmakers are buying up foundries in Europe and the United States. Even in a business as local as retailing, U.S. chains face competition from Japan, Spain and the Netherlands. In a world where geographic boundaries pose fewer and fewer obstacles, top-down investing grows more and more irrelevant.
Global investing 1.0 starts with a static allocation. From there, investors either rebalance their portfolios automatically or review their allocations at arbitrary intervals. Although rebalancing between stocks and bonds—two distinct asset classes—has proven benefits, rebalancing equities from the top down overlooks the realities of global investing. Japan, to cite the most obvious example, emerged from its lost decade only to stumble into a global recession. Yet Japan is home to world-class competitors in manufacturing, technology and pharmaceuticals, to name just three industries. The valuations of many companies have fallen in the overall decline of Japanese stocks, making some of these businesses extraordinarily attractive, in our view.
Global investing 2.0: widen the playing field and invest in the best companies
Global investing 2.0 is not about geography. It’s not about markets or market capitalizations. It’s about making the best investment decisions in a rapidly changing environment. When it comes right down to it, investors should demand to own shares in the best companies around the world, with the most attractive valuations. Given expanding global trade, where a company is headquartered is one of the least relevant variables. Far more important is the scope of a company’s business activities, where its assets are located, its management capabilities, its strategic vision and its competitive advantages. Only fundamental analysis can provide insight into these truly critical investment questions.
In global investing 2.0, equity allocation—applying the conventional definition of a portfolio’s exposure to regions, to various industries and to companies with a range of market capitalizations—is a result of multiple investment decisions. It is not the means by which an investment portfolio is constructed, but rather the incidental outcome. Investment decisions based on fundamental company security analysis are made in real time, one by one, not through a series of top-down evaluations. In volatile markets such as those we are currently experiencing, the ability to effectively analyze and respond to individual investment opportunities can provide a very real advantage compared to periodic country allocation shifts based on macroeconomic forecasts and broad market valuations.
Global investing 2.0 is all about casting a wide net. The MSCI All Country World Index, a leading global benchmark, covers 46 countries and close to 2,500 companies. Yet that’s just a fraction of the total investable universe. The number of investment opportunities continues to expand as emerging economies develop and new companies seek capital from investors around the world. The future will be challenging, yet exciting and rewarding for those investors able to take full advantage of it.
Global investing 2.0 isn’t easy. It requires a deep research capability, plus analysts and portfolio managers with broad experience in world stock markets. It requires that people on the ground meet face-to-face with a company’s management, competitors and industry experts—instead of just reading reports in the home office. It takes imagination and vision. Most of all, it requires a real commitment of resources devoted to the philosophy that fundamental global investing can provide superior retur
The old global investing 1.0 methodology is falling out of sync with our rapidly changing and interlinked global economy. Global investing 2.0 seeks to capture the full dimension of developing opportunities and to assess the full measure of possible risks. It offers investors the capability of truly understanding and taking advantage of globalization, the most significant and enduring phenomenon of our time.