Investment Perspectives

Why global flexibility is essential in a flat world

Key Takeaways

  • Globalization is creating dominant companies that transcend regional and political boundaries.
  • Global companies positioned to take advantage of the digitalization of the economy may grow rapidly and take an increasingly large share of the world’s commerce. 
  • Capital Group’s approach to this tectonic globalization shift provides the flexibility to seek the best players wherever they may be domiciled.

Globalization transcends borders and traditional investment style boxes. To be positioned for rapidly evolving global trade, powered by important shifts in technology, investors must remain flexible so they can pursue the greatest opportunities.

This isn’t just a theory. Global patterns powered by technology are already forging new powerhouse multinational companies. Multinationals account for 80% of trade, 75% of private sector research and development, and 40% of productivity growth, according to a 2015 report by management consulting firm McKinsey & Company. This new breed of multinationals is even better positioned to take advantage of the digitization of globalization. For instance, the number of active users of online platform Facebook is already larger than the population of China.

Properly positioned multinational companies could see their influence rise even further as the economy places greater economies of scale into the hands of the dominant players.

The world’s economy is morphing to one that rewards “winner takes most” companies. These businesses control flows of data and information and can tap the parts of the world with the deepest knowledge needed to get product to market quickly. This is a stark replacement from pioneers in globalization that prospered by managing the movement of physical goods and shifted capital and labor-intensive processes to various parts of the world with competitive cost advantages.

Global Integration Goes Digital
The nature of the world’s connections is changing fundamentally

Sources: McKinsey Global Institute analysis, TeleGeography

Globalization Favors Companies With the Big Ideas

The rise of an idea-driven economy — where technology is disproportionally creating more value in areas like artificial intelligence and cloud computing — favors those companies that can build scale. Companies developing idea-based products and services have rapidly risen in importance in commerce and global markets. Expect to see more idea-based companies take an oversized role in global markets, although winners won’t be determined solely by the nation these companies call home.

Idea Companies Emerge as Top Dogs
Top 10 largest companies in the MSCI ACWI by market cap

Source: RIMES

Flexibility Is Needed: Be Where the Opportunity Lies

While many large U.S.-based companies are among a number of key players in the globalization theme, rapid change requires investors to be fleet-footed enough to find opportunity around the world. Product innovation and design are no longer solely found in the labs of firms based in the United States and Europe. Research and development centers are increasingly being established in places like Bangalore and Sao Paulo. U.S. and European companies must leverage R&D capabilities in emerging markets as well as create products for those markets. Meanwhile, companies headquartered in emerging parts of the world are expected to become important global players.

Emerging Market Companies: Next Big Global Players
The Fortune Global 500 by location, number of companies

1 Africa,Eastern Europe and Central Asia,Latin America,Middle East,South Asia, and Southest Asia. 
2 China,Hong Kong,Macau, and Taiwan.
Source: McKinsey Global Institute Company Scope database of companies with revenues greater than or equal to US$1 billion a year, October 2013.

Capital’s Approach to Capturing Global Flows

A powerful example of our approach to the globalization theme is directly expressed in New Perspective Fund®. The fund’s objective seeks to diversify among blue chip companies in the U.S. and abroad, looking for those companies best positioned to not only benefit from global trade patterns but build scale that makes them difficult for rivals to disrupt. The fund may invest up to 100% of assets outside the United States, but typically it has invested in issuers both inside and outside the United States. The fund can also hold common stock, convertibles, preferred stock, bond or cash as the best way to capture the more promising opportunities.

Above all, the fund’s portfolio managers focus on companies, not countries or regions. The managers rely on in-depth global research from offices around the world to find companies positioned to gain share as globalization changes the economy. This flexibility has helped the fund deliver solid results compared against other global indexes over time.

New Perspective strategy vs. FTSE Multinationals and MSCI ACWI3
Total returns indexed to 100 as of May 31, 2000 (earliest available data)

3 Past results are not predictive of future results. Total returns indexed to 100 as at May 31, 2000 (earliest available data) to July 31, 2017. The results shown are for the Capital Group New Perspective Composite. The composite is asset-weighted based on initial weights and monthly returns. Gross of management fees and in US dollar terms. FTSE Multinationals Index (Total Return). This index comprises companies that derive more than 30% of their revenue from outside their domestic region. MSCI ACWI (with net dividends reinvested) from 30 September 2011; previously MSCI World (with net dividends reinvested).

For standardized results net of fees, refer to the composite investment results table within this communication.

Sources: Capital Group, Datastream, FTSE, MSCI.

Investment Results (%) (As of 6/30/2017)

Fund 1 Year 5 Years  10 Years  Lifetime (Fund 
 Expense Ratio  Annualized
 30-Day SEC 
Fund (F-3)

MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.

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