Foreign Language
Today’s Sunday New York Times has a column on international investing and diversification. It’s not very long, but the writer manages to use the word “foreign” an astonishing 28 times.
Some folks dislike the word “foreign” because it’s not politically correct. That’s not what bothers me here. My beef with the word is that it encourages investors to think about the world in two buckets–our markets (domestic) and their markets (foreign)–and the key exercise in asset allocation thus involves the balancing of x% in domestic stocks and y% in foreign stocks.
Asset allocation is very important. But doing it based on the location of a company’s headquarters makes less and less sense in the age of globalization. To arrive at a more meaningful long-term allocation, we need to dig much deeper to understand where each company’s true economic exposure lies.
Take an All-American company like 3M. “Minnesota Mining and Manufacturing”–it’s hard to get much more patriotic than that! But don’t tell that to 3M’s CEO George Buckley. Last week Buckley said the company is focusing on emerging markets and he expects “foreign” sales to reach 70% within 5 years, up from 61% today.
So what is 3M then? American? If 70% of their sales come from markets outside the U.S., buying shares of 3M would seem like a very odd way to invest in America’s domestic economy–assuming that’s your objective.
How about John Malone’s Liberty Global? It’s based in Denver, but all of its operations are overseas, with a big chunk in Central and Eastern Europe. Does that really belong in the domestic bucket?
What should we make of Infosys, which is located in India, but sells almost none of its services to its domestic market. Is this really an “emerging market” stock at all?
And where on earth do we put Heineken? (See related link below).
Unfortunately, this stuff isn’t easy to measure with any precision unless you have time to do a complete analysis of all the companies in your portfolio. And once you introduce mutual funds into the mix, it becomes even harder to isolate exactly how much of your money is really in each bucket.
Until we come up with a better way to account for all this, there’s a very easy solution: Stop thinking about buckets and start thinking about companies.
Related:
Draft Day (Heineken)
Comment by bb on 15 May 2006:
I often brush off those articles featuring words like”diversify” “baskets” “buckets.” I think I’m adding “foreign” to the list.
By the way, this is such a great blog. I wonder whether people take note because I don’t see lots of comments here. In fact, I don’t remember seeing any comments on this blog before.
Comment by Stocksandblogs.com on 16 May 2006:
John - this is a good point you bring up. Globalization puts most companies in the grey between domestic and international (trying to be PC here). I do think though that asset allocation by geography is important - not because the underlying companies don’t drive the business in the different markets, but because its hard to find and invest in a company thats based outside the US. In such cases, I prefer the ETF approach. I mean Brazil (EWZ), Latin America (ILF) and now Germany (EWG) have all produced annualized gains of 30-80% in the last 2-3 years and those that did not diversify based on Geography would most likely miss such easy moves.
– Faisal Laljee
Comment by aditya on 23 May 2006:
Good posts.
regards
aditya
indiamf.blogspot.com