Investing around the world
Investors seeking exposure to a particular geographic region often believe they need to build a portfolio full of companies based there. Where a company is headquartered, however, is becoming less relevant in our increasingly global economy. It’s where a company does business that counts. Most large and mid-sized companies have a combination of customers, suppliers and production lines in multiple countries.
From the United States to Japan, many of the world’s leading companies, such as Coca-Cola and Sony, generate significant revenue outside their home markets. Fiat, for example, may seem quintessentially Italian, but 91% of its revenue comes from outside Italy. Some 63% of revenue for Caterpillar comes from non-U.S. consumers. Indeed, as shown in the table below, many corporations that are strongly linked to particular countries actually derive the majority of their revenues beyond their home base.
“Why wouldn’t you want to invest in the best company wherever it happens to be based?” asks portfolio manager Rob Lovelace. “Why would you use country of domicile as a filter for determining what to invest in? Over time, we have learned that country of domicile is a less effective way of measuring a portfolio’s exposure.”
Globalization means that economies are more closely linked than ever. Free trade agreements, the European Union and its common currency, economic reforms and the rise of a middle class in developing countries have increased opportunities for companies to compete on a global basis.
The lesson? While risks still exist, mutual funds with the flexibility to invest in high-quality companies with globally diversified revenue sources provide an opportunity for investors to diversify their portfolios and benefit from economic growth wherever it may occur.