When MSCI started calculating indices in 1970, the global equity universe consisted of just 16 developed markets.
In the 1980s, the launch of the MSCI Emerging Markets Index expanded the list to 35 countries. Frontier markets and smaller companies subsequently were added, increasing the breadth and depth of the global opportunity set.
Over the past decade, investors have increasingly been moving away from home-biased equity allocations and viewing global equities as a single broad asset class.
Reasons include:
- Globalisation had transformed the investment landscape.
- A reliance on domestic 'home market' economic growth considered a risky strategy.
- Meaningful portfolio risk reduction via increasing the allocation to global equities. This strategy contributed (between 18 per cent to 39 per cent in reduced risk, and a healthy improvement in return-to-risk (between 13 per cent to 28 per cent), according to the Next Generation of Global Investors, MSCI, July 2013.
Fast forward
In 2021, the total value of global equity trading worldwide is more than $35tn (£28.6tn) and most investment management companies offer a global equity fund or fund range.
According to Citywire, today there are 223 global growth funds, 119 global equity income funds, 49 global value funds and 58 global small and medium companies funds.
My observation is that many global equity funds fail to deliver a truly global experience. Some do, but plenty find their investment compass straying into what we would view as domestic-driven rather than global companies.
In layman’s terms, the tin of beans does not always have just beans in it.
For example, many global growth funds owned, or still own, 'mega-cap' Chinese technology or growth companies such as Alibaba, TenCent and Meituan. This extends to healthcare and/or consumer companies across south east Asia.
Global equity funds fail to deliver a truly global experience.Admittedly, these companies may have fabulous long-term growth prospects but today they are not truly global in the origination of their revenues or customer base. These companies may dominate their home market or region, but not the world.
I believe that investing in these companies rather negates the global argument. They do not diversify, they are very reliant on the country or regional economic tailwinds and, as we have seen, the political backdrop is crucial. We consider this uncomfortable risk.
Globalisation kicker
It is no coincidence that the real growth in global equity funds began in the early 2000’s.
China joined the World Trade Organization in 2001 and global funds tilted toward the east, some significantly so.
This convergence of east and west turbo-charged the globalisation of the world economy that had already started following the collapse of the Soviet Union between 1988 and 1991.
The integration of former Soviet states into Europe had already added to the embryonic globalisation following the Second World War and American hegemony.
It is also no coincidence that global equity funds grew alongside a structural growth trend in globalisation. One could invest in any low-cost export-led foreign company and see a positive outcome. But life is getting harder.
As is always the case in the investment world, nothing lasts forever. And the approach many global equity funds have may prove to be yesterday’s story along with future returns to investors.
In my opinion, the Covid-19 pandemic will be recorded as the time the world witnessed the reversal of the globalisation trend. Maybe that trend had been fading, but Covid has inflicted a deep wound – the straw that broke the camel’s back.
Today we are in a world leaning towards protectionism aided and abetted by current geopolitical events and posturing. The world suddenly seems a long way from being connected. This will impact global equity funds.
Does this mean investing in global companies is no longer a valid or a compelling approach? No.
But it means investing in truly global company companies. Companies that conform to the description.
These should be large multi-national companies (MNCs) with no less than 50 per cent of sales or revenues derived from outside the company’s home country.
The world suddenly seems a long way from being connected. The investment case for MNC’s are compelling and include: less volatility through a greater ability to survive global, regional, and country economic cycles; strong balance sheets providing the financial flexibility to invest in research and development, brand advertising and marketing; conformity to global environmental, social and governance initiatives; and less political and security risk, given that corporate entities are domiciled in a robust legal jurisdiction.
The first quarter of 2022 is an excellent working example of how quickly the financial market landscape can change.
At such times, it is important to remain steadfast to your investment principles and ensure the companies to whom you entrust capital are truly global and exhibit the characteristics described above.
Mark Clubb is executive chairman of Team Asset Management
