For the last decade or more, plan sponsors generally have been less comfortable with global approaches. Money management has become more specialized with "experts" in various subsets of the investment arena. Consultants have produced scores of studies showing that skillful asset allocation can drive the overall performance of a total portfolio, and plan sponsors have become more comfortable with a top-down/macro decision-making process that brings this asset allocation decision in-house.
While most attribution methodologies focus on top-down decisions as the "driver" of performance, with stock selection becoming the residual to any value added, a well-executed global approach requires a manager who can successfully identify undervalued securities or industries from the largest possible field of opportunity. As long as a plan sponsor does not define risk as "deviation from a benchmark," we believe a global approach to research and investment is increasingly the best course.
Several factors support this argument:
More opportunity: Using the Morgan Stanley Capital International All-Country World index as the proxy for the world market as of Dec. 31, 2004, North America only accounts for 52% of world market capitalization totaling $21 trillion, leaving Europe with almost 30% and Asia, 13%. Outside North America, the relative importance of Japan has declined over the past decade while emerging markets have raised their profile, further broadening the array of choices for investors.
In investment terms, a global equity mandate offers access to a broad range of leading companies with large market capitalization and good growth prospects. According to I/B/E/S Estimates and Factset as of April 15, there are about 4,500 companies around the world capitalized at $1 billion or more, of which about 57% are based outside the United States.
Global research: Many large investment firms have reshaped their research units to focus on global sectors. Instead of having sector analysts focus on specific geographic regions, research is being organized around global economic or industrial sectors, with a regional overlay. Analysts are comparing companies in specific industry sectors around the globe and developing longer-term financial models to facilitate comparisons among companies in similar industries. This information is supplemented by regional economic and political analysis.
Global accounting standards: The drive toward uniform standards has been slow and marked by disagreement between the United States and other countries. But progress is being made and it is only a matter of time before accounting standards are harmonized across borders in the developed world.