July 22, 2007 - Fundamentally Around The World With Borderle

July 22 2007fundamentallyaround The World With Borderless Investingb

Thanks to robust markets across Europe, Asia, and Latin America—as well as a resilient global economy—the concept of investing abroad has become increasingly familiar to many investors. Over the past five years, the typical retirement plan investor's foreign equities allocation has more than tripled. Nonetheless, the distinction between investing internationally and investing globally warrants exploration. There is a significant difference between these approaches, with implications for how investors can diversify and optimize their portfolios.

Since 2003, when foreign stocks gained popularity, most mutual fund investors have employed a foreign-only strategy, allocating funds to separate portfolios dedicated exclusively to overseas stocks. These domestic and foreign allocations often operate independently, with little integration between the two. However, as globalization accelerates, some financial experts suggest that segmenting investment portfolios along regional lines might be less advantageous than adopting a more cohesive, global approach. This shift is driven by increased synchronization among global stock markets; outside of certain Asian and emerging markets, international equities tend to move in tandem with U.S. stocks more than they did a decade ago.

Tim Hayes, a chief investment strategist at Ned Davis Research, emphasizes that sector correlations have become more significant than geographic distinctions. This insight opens the door to 'borderless investing,' where investors utilize a single, globally oriented fund to access the best opportunities across sectors worldwide. Instead of holding separate U.S. and international sector funds—such as those focusing on energy, technology, healthcare, or financials—an investor might choose a global fund that dynamically allocates across regions to capitalize on sectoral and company-specific opportunities regardless of geographic boundaries. For example, a domestic fund manager might feel compelled to invest in U.S.-based automakers like General Motors or Ford, while a borderless fund manager might prefer to focus on Japanese automakers, disregarding domicile locations and concentrating purely on the sector's global prospects.

This approach aligns with Warren Buffett's investment philosophy of concentrating capital in the most promising ideas rather than spreading it thin across second- or third-best options. Evidence of the efficacy of this approach is provided by T. Rowe Price, which reported a median annual return of 10.9 percent over the past decade for its actively managed global funds, outperforming a typical 40/60 domestic/foreign equity portfolio, which returned around 9.2 percent. Such data suggest that actively managed, globally focused funds may have an advantage by leveraging their flexibility to identify the most compelling opportunities worldwide.

Institutional investors have increasingly adopted borderless strategies, investing substantial sums into globally oriented funds. In the first half of the current year alone, institutional funds funneled approximately $18.7 billion into broad, global strategies that permit investments anywhere in the world—an enormous leap from just $1.4 billion in all of 2006. This trend raises the question of whether such approaches will trickle down to individual investors, who historically have relied on region-specific or country-specific funds.

The mutual fund industry tracks a category known as 'world stock' funds, which are permitted to invest both inside and outside the United States. From January to May, these funds attracted $13.8 billion in net new assets, representing about 15 percent of all foreign-related flows. However, many individual investors often misunderstand the distinction between true global funds and foreign-only equity funds, complicating portfolio construction. Incorporating global funds into existing allocations can introduce additional complexity due to the opacity of fund strategies and the evolving nature of the category itself. Previously, many worldwide funds operated as multi-manager portfolios with segmented management teams focused on domestic versus foreign equities, but recent entrants now often follow a cohesive, single-lens investment philosophy.

For example, T. Rowe Price shifted its Global Stock fund management approach, under Robert Gensler, to focus solely on selecting top ideas across sectors without regard to company domicile. This strategy resulted in a concentrated portfolio of about 70 stocks, down from approximately 200, and subsequently ranked in the top 11 percent of its category over a three-year period through 2007, according to Morningstar. Such success underscores the potential benefits of a borderless, globally focused approach to stock selection.

Investing without regard to borders mirrors consumer purchasing behaviors, as explained by David Antonelli of MFS Investment Management. When consumers choose products like televisions, they prioritize quality or reliability—reviews or specifications—regardless of the product's country of origin. Over time, this approach to evaluation is translating into investing behaviors, where the focus shifts from the company's geographic headquarters to its ability to deliver value or performance within a global framework.

Ultimately, borderless investing offers a compelling paradigm that aligns with the interconnected nature of modern markets. The shift towards global integration challenges traditional regional and country-based investment strategies and suggests that investors who adapt to this trend may better capitalize on worldwide opportunities. As globalization continues to deepen, the capacity to look beyond geographic boundaries will likely become essential for constructing resilient and growth-oriented investment portfolios.

Paper For Above instruction

In today's interconnected financial markets, the concept of borderless or global investing has gained significant prominence. The traditional approach of segregating investments into domestic and foreign categories is increasingly being challenged by the realities of globalization, where markets and sectors across the world move in concert, diminishing the benefits of regional diversification. This evolution prompts an examination of whether investors should adopt more cohesive, globally oriented strategies to maximize returns and manage risks more effectively.

The move towards borderless investing reflects broader market trends and behavioral changes among investors and fund managers. Historically, investors built portfolios by allocating funds into domestic and foreign stocks separately, often with distinct management teams overseeing each. This segmentation was justified by the belief that regional diversification could mitigate risks inherent to specific economies or political environments. However, the increasing correlation among global equities, driven by globalization, technological advancements, and synchronized monetary policies, reduces the diversification benefits of purely regional approaches.

Research indicates that global markets are now more interlinked than ever, with sector performance often transcending geographic borders. Tim Hayes from Ned Davis Research notes that sectors such as technology or healthcare tend to outperform or underperform collectively, regardless of whether the companies are based in the U.S., Europe, or Asia. This interconnectedness suggests that a purely regional investment approach might overlook the broader, more opportunistic investments available across the worldwide landscape.

Borderless investing entails utilizing funds that do not restrict themselves to regional confines but instead seek to identify the best investment opportunities globally. These funds typically employ a single, unified investment lens, allowing managers to concentrate on sectors and companies worldwide without regard to domicile. For example, a borderless fund manager might allocate capital to Japanese automakers for auto sector exposure, even if the fund’s overall strategy does not prioritize the country of origin but instead emphasizes sector performance and company fundamentals.

The advantages of this approach are multifaceted. First, it enables managers to concentrate on their highest-conviction ideas, akin to Warren Buffett's philosophy of investing in the best companies without limitations imposed by geography. Second, it broadens the universe of investment opportunities, allowing for better diversification across sectors and markets that might be undervalued or overlooked in country-specific funds. Third, empirical evidence suggests that actively managed global funds employing such strategies have achieved competitive, often superior returns compared to traditional balanced portfolios.

Data from T. Rowe Price and other industry sources reaffirm the potential benefits of global-focused funds. Over a decade, actively managed global funds posted median annual returns of around 10.9 percent, outpacing balanced portfolios with domestic and foreign stocks. These results underscore the potential for higher alpha, especially when fund managers employ a concentrated, bottom-up stock selection process that is unconstrained by geographic boundaries.

Institutional investment flows also reflect this growing preference for borderless strategies. In early 2007, institutional investors invested over $18.7 billion into globally oriented funds—an extraordinary leap from the mere $1.4 billion invested in the previous year. Such large-scale allocations suggest a confidence in the global investing paradigm and a recognition that in a highly integrated world economy, the benefits of regional restrictions diminish.

While individual investors are increasingly attracted to global funds, challenges remain in integrating these strategies into existing portfolios. Many retail investors still confuse 'world stock' funds with foreign-only funds, and choosing the right globally integrated strategy requires understanding the nuances of fund management styles and investment philosophies. Moreover, as the category evolves, funds are shifting from multi-manager constructs to single-lens, global-focused funds, offering more streamlined and consistent investment approaches.

In conclusion, borderless investing embodies a natural evolution dictated by global market dynamics. It allows investors to focus on the best opportunities without being hampered by geographic limitations, aligning their strategies more closely with the realities of modern markets. Despite some complexities and the need for investors to understand the unique characteristics of these funds, the long-term potential for higher returns and better risk management through a truly global perspective appears compelling. As globalization continues to advance, adopting a borderless investment approach will likely be essential for staying competitive in the pursuit of wealth growth.

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