Over time, we have learned that country of domicile is a less effective way of measuring a portfolio’s exposure. Sometimes people ask me to explore establishing a fund invested in those U.S. companies that do business abroad. “Why take the risks of investing internationally when I can get, say, 40% exposure to non-U.S. revenues by investing in U.S.-based companies?” they ask. The straightforward answer, for one, would be that the decision-making and the outcome are not aligned.
For an investor who would invest only in the U.S., there are areas of the markets, such as the European luxury goods makers or the luxury auto companies, that have an opportunity globally that is not tapped by the U.S. companies. Similarly, several of the largest pharmaceutical and mining companies are not domiciled in the U.S.
If you look at potential investments in the fast-growing developing economies, some of the best opportunities are in branded consumer goods companies, technology companies and health care companies. Yet, all three of those industries are heavily underrepresented among companies listed in the emerging markets index. Why wouldn’t you want to invest in the best company wherever it happens to be based? Why would you use country of domicile as a filter for determining what to invest in?
One of the other questions on investing in global markets surrounds corporate governance. In my view, there is risk in investing in U.S. companies from a regulatory or accounting standpoint as well, and there are very high-quality companies outside the U.S. that are audited by the best firms that we view as quite safe investments.
Implications of Using a Revenue-Based Approach
- Changes in company reporting of financial data
- Screens used to define mandates
- Move toward objective-based investing
In my opinion, there are three main implications of shifting away from a traditional approach based on country of domicile. One, we need to think about changing how companies report financial data. That may be the easiest one. Reporting on a revenue basis is one obvious way to do it. But currently companies do not report with enough detail for us to consistently do this. My hunch is pressure will be put on companies by investors and accounting professionals, and we will begin to get better reports, which will give us better data — but it will be a multiyear process. We did it on our own, but it took a lot of time and effort. You may see dual reporting for a while: we will report in the traditional context of country of domicile, and in this new way. But my belief is that, a decade from now, we will have developed more sophisticated ways to get at this.
The second implication would be regarding the screens we use to define mandates. What is a U.S. fund or a U.S. mandate? I think we need to rethink this.
Third, this is going to push the industry toward more objective-based investing. In other words, what investment themes are we trying to get at? Are we focusing on dividends, growth of dividends, income, or some aspect of economic change? I think that is going to begin to swing the pendulum back toward objective-based investing after a long move toward geography-based investing.