It is still important for investors to look at the regional weightings of their global equity funds before buying, according to investment professionals, although some argue that the sweeping globalisation of companies has made this less relevant.
Given that transport and communication links between countries and regions have improved exponentially over the years, the proportions of global-facing companies within various indices has gradually increased.
For example, last year’s plummet in sterling actually bolstered the performance of the FTSE 100 index, given its dependence on exports to overseas countries where their currencies where comparatively stronger.
Performance of index in 2016
Source: FE Analytics
Many global fund managers, in fact, argue that the regions in which a company’s revenues are earned are more important than where it is headquartered, which is often the only data available on factsheets.
If this is the case, should investors start paying less attention to the regional weightings of the funds they are buying into and focus more on other fundamentals?
Martin Bamford, managing director of Informed Choice, says regional details still matter despite increasing globalisation.
“Investors should give some thought to the regional weighting of their chosen global equity funds,” he said. “Unless you are blindly following an index, typically the MSCI World which is favoured by most global equity index trackers, then part of the active fund management you are paying for is regional allocations.
“Seeing this data on the factsheet allows you to better understand where a manager is underweight or overweight relative to the index, which offers insight into their strategy.”
Ben Yearsley, director of Shore Financial Planning, agrees that it is useful for an investor to know where the exposure of their fund lies, particularly within large areas such as the US and the EU. However, he points out it is also useful within regional funds to ensure they are not overly exposed to one market.
“I often use global funds alongside country-specific funds,” he said. “However, if the funds invest in large-cap stocks, arguably the country they are based in is of less relevance.
“If the fund invests in mid- and small-cap companies then it is important, as these will be more domestically-focused.”
Adrian Lowcock, investment director at Architas, says regional weightings of a portfolio can be used to assess and analyse the performance of the fund, its characteristics and the knowledge of the manager.
He also says it helps when checking whether the fund is positioned as the manager expects, as well as how sensitive it is to different macro events.
“Generally I prefer stock selection over country selection, but knowing how much a fund has allocated to each country can help with portfolio construction; if you are underweight or overweight a region, you might add a country-specific fund,” he explained.
“It can also help to determine the risk of the fund; a higher weighting in emerging markets would suggest higher risk whilst a very high country weighting might indicate a manager is just trading on the momentum of a country over genuine stock selection and analysis.”
When it comes to what investors should focus on when selecting a global equity fund, Yearsley says it depends on how they manage their portfolios.
“If you simply have a portfolio of global funds then it doesn't really matter as you are relying on the manager to pick the best stocks, sectors and countries,” he reasoned.
“If you are running a core and satellite approach to your portfolio – in other words, holding global funds as core then individual country funds alongside, it means that it is important knowing the asset allocation of the global funds to ensure you aren't doubling up on your bet.”
However, Tilney Group’s Jason Hollands says the likes of London and New York stock exchanges are now very much global capital markets dominated by large multi-national businesses, but also include many emerging market companies.
For instance, he points out that Chinese internet giant Baidu is listed on the US’ Nasdaq.
“Traditional geographic asset allocation analysis based on which exchanges companies in a portfolio are listed on is becoming increasingly less relevant despite the fact that much of the wealth management industry and I suspect most investors still principally makes equity allocation decisions on this basis,” the managing director said.
“People too often confuse equity market allocations with exposure to a particular economy but in many cases the relationship is pretty marginal or even irrelevant.
“For example, a portfolio with a large position in Anheuser-Busch In-Bev might superficially look like a big punt on Belgium – but this is actually the world’s biggest brewer with more exposure to Mexico than France’s small neighbour.
“Likewise, Switzerland represents a big slice of European markets because it is the domicile for global giants such as Nestle and Novartis rather than because of its domestic economy.”
That said, Hollands points out that many fund factsheets also dovetail this type of geographic analysis with the underlying industry sector exposure of a portfolio, which he believes is more useful to gauge where the real bets are being made.
Average regional weighting of funds in IA Global sector
Source: FE Analytics
“Perhaps in time firms will be able provide more granularity on where a portfolio’s underlying earnings exposure is, so a more meaningful picture of how sensitive a portfolio is to a particular economy or region can be gleaned,” he added.
In a future FE Trustnet article, we look at the global equity funds the industry commentators have chosen based on their selection process and why.