Broader Horizons, Better Returns?

Grab your passport: higher investment returns can be found abroad. 

Investing outside one’s own backyard would improve institutional investors’ returns—but most in the US refuse to do so, according to a white paper by Portfolio Evaluations.

The investment consulting firm said although 75% of the largest investible companies were found outside the world’s largest economy, many in the US remained insular in their asset allocation.

“In keeping with longstanding practices, many plan sponsors continue to maintain 80% or more of their equity allocation in domestic stocks, despite the fact that the geography of the investable landscape has changed,” the paper claimed. “US companies presently account for only about half of the total global market capitalization and a far lower percentage of revenue.”

The consultants showed that the number of “investible” countries—those that host these large companies—has risen from 18 in 1970 to 45 in 2010. They added that those investors who have refused to adapt their investment strategies to take into account this change would have already missed out on growth rates that rocketed in some emerging markets over the past 30 years. By allowing these “new” countries in to their portfolio, investors would now be able to capture some of the growth, but they have missed out on the boom time.

“Most economists predict that population growth over the upcoming decades will be weaker than it has been in the past. Over the past few decades, several countries have benefited from rising populations of working-age people,” the paper said. “While many emerging and developing markets will still have strong population growth (with China being a notable exception), developed countries (with the exception of the US) will have contracting working age populations.”

The consulting firm predicted that although developing economies had only made up 25% of global GDP in 1990, by 2030, this figure was more likely to be around 48%.

“With the global economy becoming more integrated from a revenue perspective, asset allocation strategies focused on a global opportunity set to add alpha, are best positioned to take advantage of changing trends,” the paper warned.

However, before making any changes, investors should examine the businesses they already hold, the consultants said.  

“Although many companies generate their revenues outside of their country of domicile, many investors maintain an asset allocation based on a traditional boundaries approach, which may misrepresent the risks within the overall portfolio.”

About half of the revenues of companies in the MSCI All Country World Index are now generated outside of the US and developed Europe, the paper claimed. “Those revenues are largely generated in emerging markets despite those markets only representing 11% of the world’s investment opportunity based on market cap.”

The full paper is found on the consultants’ website.