Hedge funds are only one piece of the increased level of financial innovation. Because of technological innovations among many other factors, the globe is a pretty small place in many respects. The attached article discusses investing globally. The importance of a global footprint is an ongoing theme, which also ties into this topic on borderless investing.
To what extent do you agree or disagree with this investing globally approach and why?
July 22, 2007
Around the World, With Borderless Investing
By PAUL J. LIM
THANKS to hot markets in Europe, Asia and Latin America — as well as the surprisingly strong global economy —
the idea of investing abroad is no longer foreign to many investors. In fact, for the typical retirement plan investor,
the stake in foreign equities has more than tripled over the past five years.
But in addition to investing internationally, have you considered investing globally? There’s a difference.
Since 2003, when foreign stocks came into vogue, the bulk of mutual fund investors used a foreign-only approach to
buying them. In other words, investors who already had meaningful domestic exposure have been putting new
money to work in separate portfolios dedicated to overseas stocks. And the two sides of their investment strategy —
the domestic portion and the foreign allocation — generally operate independently.
But with globalization upon us, some people wonder whether it’s time to stop segmenting investment portfolios
along regional lines.
After all, with the exception of parts of Asia and the emerging markets, global stocks are moving much more in sync
with domestic equities than they did a decade ago. “As things have gotten more globally correlated, sectors have
become almost more significant than regions,” said Tim Hayes, chief investment strategist at Ned Davis Research in
How would borderless investing work? Well, instead of putting some money into a domestic fund that seeks out the
best energy, technology, health care and financial companies based in the United States, then investing in a separate
fund that looks for the best stocks in those same sectors overseas, an individual investor might look to a globally
oriented fund that scours the world for the best opportunities in each sector.
For instance, while a domestic fund manager might feel compelled to invest in General Motors or Ford Motor to gain
exposure to the auto sector, the manager of a borderless fund “might decide not to own any auto companies in the
U.S. or in Europe — just to own them in Japan,” said Shigeki Makino, chief investment officer of the Putnam Global
In theory, this approach allows fund managers to adhere to a very Warren Buffett-like principle: to concentrate your
bets only in your top ideas, rather than watering them down through your second- and third-choice picks.
There may be something to this approach. T. Rowe Price, the asset management firm, recently crunched some
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numbers and discovered that actively managed global funds earned a median annual return of 10.9 percent over the
past decade, through April. That compares favorably with the 9.2 percent annualized gain you would have enjoyed in
a divided portfolio consisting of 40 percent domestic stocks (represented by the Russell 3000 index of domestic
shares) and 60 percent foreign stocks (as measured by the MSCI All Country World Index, excluding the United
The notion of borderless investing appears to be taking hold among institutional investors. Through the first half of
this year, institutional funds placed $18.7 billion into globally oriented strategies that permit managers to invest
anywhere in the world, according to Eager, Davis & Holmes, a consultant to institutional managers that is based in
Louisville, Ky. That is a huge jump from the $1.4 billion that was invested in this strategy in all of 2006. “The
question is: Is this an anomaly, or is it something that will continue to develop going forward?” said David F. Holmes,
a partner at the consultancy.
An even bigger question is whether individual investors will follow institutional investors to this go-anywhere
Morningstar currently tracks a “world stock” fund category, which represents portfolios that are allowed to invest
both inside and outside the United States. The category attracted $13.8 billion in net new money, or about 15 percent
of all foreign-related flows, from January to May, according to the Financial Research Corporation, which tracks fund
But many people don’t understand the distinction between a global or world stock fund and a basic foreign-only
stock portfolio. Moreover, fitting a globally oriented portfolio into an existing mix of domestic and foreign holdings
can be challenging. Yes, you could take small slices from both your domestic and foreign portfolios and replace them
with a global fund. Yet because you will never know with absolute certainty how much money your fund manager is
deploying here and abroad, such a move can add a level of complexity to creating an overall asset allocation strategy.
Adding to the confusion is the fact that this category of funds is still evolving.
“This category has really changed,” said Bridget B. Hughes, a senior analyst for world stock funds at Morningstar. In
the past, she noted, many world stock funds were really multimanager portfolios, with part of the assets handed to a
domestically minded manager and the rest going to a foreign-stock team.
But in recent years, she said, “newer funds have been introduced that are truly globally minded and view things with
a single lens.”
FOR instance, two years ago, when T. Rowe Price installed Robert N. Gensler as manager, it shifted its strategy for
the T. Rowe Price Global Stock fund to this single-lens approach.
Mr. Gensler was allowed to pick only his favorite stocks within each global sector — without strict regard to where the
companies were domiciled. He quickly took the fund from around 200 holdings down to about 70. And after trailing
its peer group average in 2002, 2003 and 2004, T. Rowe Price Global has ranked in the top 11 percent of its category
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over the three-year period through Thursday, according to Morningstar.
When you think about it, borderless investing is similar to the way consumers make their buying decisions, said
David A. Antonelli, chief investment officer for non-United States equity investments at MFS Investment
Management, whose MFS Global Equity fund also invests in this borderless style.
“When you’re buying a TV, you might look for a model with the best picture quality, or you might look to what
Consumer Reports said was is the most reliable television,” he said. “That TV might end up being a Japanese TV, but
you’re not buying it because the company that made it was headquartered in Japan.”
He added that “over time, this will be the same way people invest.”
Paul J. Lim is a financial writer at U.S. News & World Report. E-mail: [email protected]
Copyright 2007 The New York Times Company
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