Diversifying an investment portfolio across countries no longer offers the same protection it once d...
Diversifying an investment portfolio across countries no longer offers the same protection it once did, claims Pauline McPherson, investment director at Standard Life Investments.
At the Investment Week Forum in Edinburgh, McPher- son explained this is because companies are operating on more of a global basis than ever before, while the returns provided by national stock markets are increasingly correlated with their international peers.
As such, global sectors have grown in importance and can increasingly be used as the building blocks of portfolio diversification, she suggested.
'The prevalence of global brands in our daily existence is the manifestation of the prevailing economic reality ' rapidly expanding trade and capital flows, increasingly globalised supply chains, and the rapid expansion of trans-national activity of our companies has made the world a smaller place,' she said.
'Technology has provided the lubrication in this system to allow it to run more efficiently and swiftly, while the process has proved resilient to shocks such as 11 September, which might have easily resurrected protectionism in the form of patriotism.'
She added investors are now finding themselves in a new world of inter-connectivity, where traditional approaches to international investment, which have relied heavily on top down allocation across a range or regions and countries, are no longer sufficient.
'The landscape has change and geographical distinctions are blurred,' she said. 'Last year, the UK advertising and media group WPP derived a higher percentage of its revenues from the US than Microsoft, which raised the question of which of these two companies is the US share in portfolio terms?
'More than two thirds of the revenue of the top companies listed in the UK is generated overseas, and that is not going to change. Companies continue to look across borders.'
She told delegates at the Forum that the benefits of risk reduction and return enhancement from investing internationally are delivered more successfully via a global sector and stock selection approach, rather than via a process that relies on bundling companies according to geographic domicile.
The emergence of truly global companies over the past decade has seen indices and the portfolios that follow them increasingly concentrated.
The mega-cap companies such as General Electric are larger in market cap terms than entire countries. So the focus needs to be on companies, not countries, and for this you need a global perspective, she added.
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From June 2019