The New Geography of Investing: Morningstar Interviews Rob Lovelace | Capital Group


Investment Insights

August 2014

The New Geography of Investing®: Morningstar® Interviews Rob Lovelace

On June 19, 2014, Janet Yang of Morningstar interviewed Rob Lovelace at the Morningstar Investment Conference on the subject of The New Geography of Investing.



Robert W. Lovelace


Janet Yang: I'm Janet Yang with Morningstar. Today I am at the Morningstar Investment Conference with Rob Lovelace from Capital Group, The American Funds.

Rob, thank you for joining us today.

Rob Lovelace: Real pleasure. Thank you for having me.

Yang: You and your team have been doing some pretty interesting research looking at your funds and your portfolios and their country exposure, not necessarily by their country of domicile, but from where their revenues are coming from. Can you tell us a little bit more about that research?

Lovelace: Absolutely. We're referring to it as the new geography of investing. It really is recognizing the fact that, back in the '60s and '70s, where a company was based, where it was listed, was a really good proxy for where it did business. We all know that the world is globalized, and I think everyone's aware that most companies do some business abroad, and I think in the '90s and 2000s, it still was a minority of the total revenue of the company that came from other countries.

But really in the last 10 years, things have changed to the point where we probably need to start paying attention to it now. And that's the work that we have been doing, and that's what the new geography is about, which is finding a new proxy for thinking about where a company does business. You can think of lots of examples--the auto companies are probably the easiest ones--of companies that are based in Japan, but do a majority of their business in the United States, or that are based in the U.S. and are one of the biggest auto producers in China, or based in Europe and do business everywhere, except maybe not so much in their home country.

So, what's the best way when you're looking at your portfolio to think about the actual exposure of that company? Where a company is listed still matters. That has an impact, obviously, on the currency in which the stock is denominated, maybe their liabilities, and certainly investors in that country will look at it that way and what index they are in. But you can look at the revenues now--companies are reporting it in a way that actually gives you enough information.

So we think revenue is the best new proxy for where a company does business, and we're working on developing standards so that can be part of normal reporting.

Yang: Can you give us an example, maybe one that an investor would find surprising, in terms of where it's domiciled versus where its revenues are actually coming from?

Lovelace: There is a long list of these. I think starting at a bigger level and bringing it down, if you look at Europe, it might surprise, it might not surprise, people to realize that actually in the European index, more than 50% of the revenue of the companies on the index comes from outside of Europe. I think part of that speaks to where growth has been in the world. Growth has been in the United States, growth has been in emerging markets, and those companies have very logically shifted toward that.

And if you look at the oil companies, it probably wouldn't surprise people that TOTAL and other firms get a majority of their revenue from outside of their home countries or the country of listing. But Nestle, which is the largest index component, actually gets a majority of its revenue from outside of Europe. A lot of the pharmaceutical companies, again, that are in the top 10 there, get most of the revenue from the U.S., and then also an important component from emerging markets. These are the types of stocks that I think catch people's attention.

Another example, when we were looking at the U.S. recovery, I think everyone would think of investing in Home Depot; as construction comes back that's a really logical place to go. But they might not think of a Hong Kong-listed--and therefore classified as a Chinese company--Techtronic, which happens to be the number-two power tool maker both in the professional and individual power tool markets.

You would miss these opportunities if you limited yourself just to the country of domicile in terms of thinking about how to benefit from a growing U.S. economy. Or how do you really get at a European recovery if most of the companies there do business outside of Europe?

Yang: That's really interesting. Maybe we can connect that idea to one of the portfolios where you're a manager, American Funds New World. At least our data shows that the emerging-market stake seems to have been coming down from its historic norms. What does your revenue source [data] show about that fund?

Lovelace: The New World Fund, just to remind everybody, is a fund that focuses on the emerging-markets opportunity, and it was created 15 years ago already with this initial idea that we need flexibility in country of domicile when we think about the emerging-markets opportunity.

Specifically, the emerging-markets-domiciled companies, the ones listed in those countries, tend to be very overweight or overexposed to the commodity companies, banks, and telecoms. And when I think about investing in developing countries and emerging markets, what I'm excited about is the consumer opportunity--rising living standards. It's both consumer stocks as well as infrastructure.

And I bet if I said to you, you're excited about emerging markets, I'm going to give you a bunch of commodity producers, you'd probably say, no, no, no; that's not what I'm interested in at all. I want branded goods. I want pharmaceuticals and rising health care. I'm interested in technology, particularly branded consumer aspects of it. Those are the pieces you'd want. Those three sectors--technology, health care, and consumer--are underrepresented in the companies listed in the developing world.

So, New World Fund was specifically designed to give us flexibility to invest in companies wherever they are based that do a substantial amount of business in emerging markets.

What you're referring to is, in the fund, the exposure to companies specifically listed in those countries is going down, while our exposure to those listed outside but doing business there is going up. What that would tell you is, the big index components of those based there are the state-owned enterprises--generally oil producers in Russia, in Brazil, in China; big banks, generally in Russia, Brazil, and China--and we're less excited about those. What we're more excited about is rising auto consumption in China, and the way to get at that is, interestingly, not so much through the Chinese brands, because the Chinese auto companies are still developing a national brand, they're still trying to figure out what they want to be. But the Koreans, the Japanese, General Motors, the Germans are the ones building factories in China and taking advantage of that exciting opportunity.

When you break it down to the specific company level, what we're finding is, these are the better ways to get at that fast-growing consumption. Even if you're worried about the Chinese economy, the auto market there is going to continue to expand, and it's generally companies domiciled outside of China that seem to be the ones benefiting from it. That's an example of why you're seeing that shift.

Yang: That's some really great food for thought, and it was a pleasure. Thank you very much for joining us today.

Lovelace: Thank you. I really appreciate the questions.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

You could lose money by investing in American Funds U.S. Government Money Market Fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency, entity or person. The fund’s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will do so at any time.

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks. 

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. 

State-specific tax-exempt funds are more susceptible to factors adversely affecting issuers of their states' tax-exempt securities than more widely diversified municipal bond funds. Income from municipal bonds may be subject to state or local income taxes . Certain other income, as well as capital gain distributions, may be taxable. 

Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.

Bond prices and a bond fund's share price will generally move in the opposite direction of interest rates.

Investment allocations for funds of funds may not achieve fund objectives. There are expenses associated with the underlying funds in addition to fund-of-funds expenses. The funds' risks are directly related to the risks of the underlying funds, as described herein. 

Unlike mutual fund shares, investments in U.S. Treasuries are guaranteed by the U.S. government as to the payment of principal and interest. In addition, certificates of deposit (CDs) are FDIC-insured and, if held to maturity, offer a guaranteed return of principal.

The Capital Group companies manage equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice. 

Regular investing does not ensure a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

When quoting fund results to your clients, please refer to the American Funds quarterly statistical update, which includes results that reflect deduction of applicable sales charges. Please remember when sharing information on the American Funds with your clients that, in addition to providing current results and prospectuses, you should also discuss the risks and costs associated with the investment.

Past results are not predictive of results in future periods.