In Global Economy, Investors Seek a Similar Approach
Sunday, April 23, 2006
When you're researching investment opportunities, do you stop at the U.S. border?
Global investors don't. Rather than sort stocks by geography, global investors buy the world's best companies, regardless of where they're based. Fund managers who take this approach wind up with far-reaching portfolios, which some consider to be better core holdings than traditional large-cap domestic equity funds.
Most American investors build their portfolios with domestic funds, then add overseas exposure with international funds that invest in non-U.S. issues. This may have made sense years ago, when U.S. companies accounted for more than two-thirds of the investable market, but these days it's "really quite quaint," said Rob Gensler, portfolio manager of T. Rowe Price Global Stock Fund (PRGSX).
In a global world with a $45 trillion economy, 7 billion people and an investable market cap of about $40 trillion, of which the United States accounts for about half or slightly less, depending on how you measure it, investing by region makes less sense than it once did.
"I think of the world as being without borders," Gensler said. "It's one global economy, with a lot of regional differences."
In building his portfolio, which never numbers more than 100 names, Gensler has focused less on geography than on gathering the best investing ideas in the world. Key to his strategy is recognizing industry patterns as they're repeated across the globe. This has become more important as business models migrate and best practices get shared at faster rates.
"To think globally doesn't mean to invest in global businesses; it means, 'I've seen this somewhere else; it's different here, but there are similarities,' " he said. "Only a global manager has that full opportunity set and that mind set. How do you predict the future? You can do it by looking around, and using what you've learned from other places, by recognizing patterns."
Gensler's fund, a Morningstar Inc. pick in the world stock category, invests in mostly large-cap growth companies. U.S. companies account for the biggest chunk, making up slightly less than half the holdings; about a quarter is in Britain and Western Europe, 9 percent is Japan and the rest is scattered about in Latin America, Asia excluding Japan and emerging markets. By sector, it's about 28 percent financial services, 13 percent health care, 12 percent telecom and 9 percent energy. The fund holds a number of names you know, as well as many you probably don't.
"The best name doesn't mean the biggest or the highest market share," he said. "It's whether the trend is improving."
Outside the United States, go-anywhere world or global funds are often the default core investment of individuals, said Kai Wiecking, an analyst with Morningstar. And with so many world-class companies based outside our borders, the global approach is increasingly appealing to U.S. investors.
When you start thinking globally, your perspective changes. What's domestic, anyway? New York-based oilfield services firm Schlumberger Ltd. draws 78 percent of revenue from outside the United States. McDonald's Corp., as American a company as you can imagine, also relies heavily on overseas revenue.
"Why would you restrict yourself?" Wiecking asked. "In the future, what I'm hoping to see is for the global fund to be the natural choice of beginning investors looking at just one stock fund to start out with, rather than combining a domestic and international fund, which in each case the manager is artificially restricted."
While international markets have performed exceptionally well in recent years, they can be quite volatile. Still, most U.S. investors are underexposed to other parts of the world, and despite the potential for setbacks -- particularly in emerging markets -- the long-term trend is positive.
If you're going to invest in a global stock fund, do your homework, especially if it's going to be your core holding. When evaluating a fund, pay attention to how much risk it takes. See how much it holds in emerging markets, watch for risky sector plays and look at the manager's record. Also pay attention to how the fund fits with your other holdings, and make sure the overlap isn't too great. You could wind up overweight in certain regions or sectors.
There are about 110 global stock funds in Morningstar's database, and the number is gradually on the rise, though there are still four times as many funds in the foreign category, which invest in non-U.S. issues.
In addition to the T. Rowe fund, Morningstar's world stock picks include Oakmark Global (OAKGX), a more value-oriented choice with a greater emphasis on mid- and small-cap stocks; Oppenheimer Global (OPPAX), a growth-focused option with a more aggressive strategy; and American Funds New Perspective (ANWPX), which focuses on global market leaders.
"Globalization is a real trend, it's here to stay, and the times of U.S. dominance of capital markets have passed," said Wiecking. "If you're a beginning investor, or you want a well-rounded large-cap portfolio with the best companies in the world, the world stock category has several worthy options."