Borderless Investor

Nothing makes the arbitrary separation of foreign/domestic or developed/emerging markets look more ridiculous than the mining sector. Amazingly, people still think this way. Bloomberg points out that emerging market mining shares sell for a 23% discount to US-based peers, despite much, much better fundamentals.

Olivier Eugene, a fund manager at AXA sums it up nicely:

“It is totally irrelevant to pick up a commodity producer because of its location,'’ said Eugene, who owns shares of Vale and Russia’s OAO Novolipetsk Steel and doesn’t hold any steelmakers in the U.S. or Japan. “Where the companies are listed and where they are headquartered is irrelevant.'’

Indeed.

It’s one thing to move a couple key executives to London or even change your “official” headquarters to Dubai (as Halliburton has done). But it’s quite another to shift an entire business unit across the Atlantic.

That’s what GE is doing with its consumer finance business “GE Money”.

Not surprisingly, it has ruffled a few protectionist feathers.

Take a closer look, though, and it’s not as dramatic as it sounds. GE Money already generates about three-quarters of its profit outside the US, according to the FT. Nor does the move involve a whole lot of employees.

GE said moving GE Money’s headquarters from Stamford, the Connecticut town that has become a haven for hedge funds and other finance businesses, to London would involve the transfer of fewer than 30 people. It added that GE Money was a decentralised business, with operations in more than 50 countries.

WSJ’s Deal Journal Blog reads between the lines for some other explanations.

The plunge in global markets in the first two weeks of the new year has been painful, but it will ultimately create a bevy of buying opportunities. But sifting through the wreckage yourself can be a daunting task. The good news is that some of the best global value investors around are opening their doors to new money again.

Tweedy Browne, Oakmark, Third Avenue and First Eagle have all recently opened global value funds that had previously been closed to new investors. Morningstar’s Bill Rocco takes a closer look here.

There’s no shortage of places to find valuation ratios (P/E, price-to-book, price-to-sales, etc.) on the web. But good luck finding a reputable data provider that compares them across countries, in a consistent manner, and for FREE. The S&P/Citigroup family of global indices is an exception, and a very handy resource.

Global diversification can work wonders for a company’s performance. But it can’t work miracles. General Motors is Exhibit A. Bloomberg reports that GM expects to garner 75% of its revenue from outside the U.S. by 2010 versus 58% today. Compared with its U.S. operations, its business is booming overseas.

“GM has very aggressive growth plans in 2008, particularly if you look at markets like China, India, Brazil and Russia.'’

Preliminary results indicate GM set 2007 sales records in Europe, Asia and other non-North American markets, Wagoner said.

That’s fine and dandy, except for one small catch:

U.S. volume fell for the eighth straight year. GM lost $38 billion through September. Profits overseas weren’t enough to overcome losses at home and a $39 billion third-quarter deficit due mostly to a writedown of the value of future tax benefits.

Whoops.

Wagoner may have a good point when he notes that GM probably doesn’t get enough credit from investors/analysts for all these global opportunities. But when competitors like Toyota, BMW, et al can tap into the same opportunities without the excess baggage at home…why bother?

Look for a few changes here at Borderless Investor in the year ahead. The previous post should give some sense of what’s to come. I am hoping to make the site a bit less bloggish and more of a collection of helpful links to articles, data sources, and other sites of interest to fellow Borderless Investors. In other words: fewer rants, more resources. Please free to send along your favorites - any and all suggestions are welcome.

The IMF’s Data Mapper function is a really cool way to play around with global economic stats. This data map shows GDP growth rates by country. It seems pretty clear from this that even if the US and European economies slow down a bit, there are plenty of other regions out there that can pick up the slack.

WSJ has a copy of a memo from M&A uber-lawyer Marty Lipton to clients on the outlook for 2008 M&A activity.

Lipton cites 6 reasons why M&A will continue despite the credit crunch:

• The desire of some countries to create “national champions” in basic industries, and of a
few countries, like Russia, to create “global champions.”
• The dismantling of defenses against hostile takeovers in response to shareholder pressure
and the reluctance of boards of directors to “just say no.”
• The arrival of mergers and LBOs in countries that until now have had little such activity.
• The receptivity (and strong encouragement) of institutional investors and activist hedge
funds to M&A transactions.
• Greatly expanded privatization of infrastructure.
• Dispositions, demergers and spinoffs by companies adopting (often in response to
shareholder pressure) policies to focus on core competencies.

Half of these points (national champions, privatization of infrastructure, and arrival of LBOs in new lands) have an explicit non-US component. And the rest potentially come into play in cases of cross-border activist pressures, restructuring, etc.

Then there’s the sovereign wealth funds (SWFs):

The wild card in 2008 will be the M&A activity of companies in the commodityrich
countries and China and India and the investment activity of their sovereign wealth funds.
During 2007 the SWFs made major investments in private equity funds and their management
companies and in financial companies seeking additional capital. The activities of SWFs in 2008
could be a major factor in overall global M&A activity.

Lipton doesn’t come right out and say it, but basically M&A law has become a borderless game.

Today’s “Ahead of the Tape” column in WSJ (sub req’d) noted the role of emerging markets as an engine for global economic growth. This time it’s emerging markets pulling the US along, rather than the other way around, as it has been in the past.

The column cites IMF forecasts call for about 2.5% economic growth in the developed world vs. 8.1% in emerging markets.

Also worth noting:

“China will be a bigger contributor to global growth than the U.S. according to the IMF. Goldman Sachs calculates that the so-called BRICs - Brazil, Russia, India and China - are contributing far more to global consumer spending than the U.S. so far this year.”

Of course, this doesn’t make us immune from recession, but it sure makes it a heck of a lot easier to absorb the bad news flow from the housing market, Wall Street’s credit crunch and so forth.

Borderless investing - not just the concept, but the term itself - made a rare appearance in Sunday’s New York Times. Citing data on global funds, the piece notes a growing interest in borderless investing among institutions.

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.

Boston-based MFS, which pioneered mutual fund investing in the 1920s, is a borderless believer.

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.”