Making asset allocation decisions based on where companies are headquartered is an out-of-date investment strategy that may lead to unintended risks and outcomes.
Capital Group investment specialist Andy Budden said the traditional approach to considering the viability of a company – based on where it is domiciled – no longer reflected where it was producing the most revenue.
“Basing your investment decisions on where a company gets its post delivered is simply no longer the best approach,” Budden said.
According to Budden, investing via geography can create skewed portfolios, particularly for those investing in market indices, since these strategies do not examine the underlying sources of revenue and can place an investor outside their chosen market.
“Investors in a portfolio that replicates the S&P/ASX 200 might not get the Australian concentration they’re seeking, given that approximately 43 per cent of revenues generated by companies represented in the S&P/ASX 200 come from outside Australia,” Budden said.
Analysis conducted by Capital Group found this was not an issue limited to Australia. Seventy-seven per cent of revenue generated by companies on the FTSE 100 is drawn from outside the UK and 40 per cent of revenue of companies in the S&P 500 is drawn from outside the US.
Budden said the key change that had taken place in investment thinking has been globalisation, which is reflected in the world-wide reduction in import tariffs.
According to Budden, import tariffs have dropped from an average of 26 per cent to 8 per cent and global trade has increased – but investment strategies have overlooked this development.
“Australian investors are well attuned to globalisation but they may need to change the way they view – and use – traditional stock market indices,” Budden said.
He also stated that investors and researchers have been limited in the information they have about the sources of revenue, but that more companies are beginning to supply this information.
