Thomas Friedman’s book The World Is Flat, is now nearly 10 years old. In his book, Friedman recalls a trip to Bangalore, India, when he realized that globalization had gone so far as to challenge core economic concepts and potentially put them into disrepute. The breakdown of barriers among countries and governments over the past millennia has allowed companies to spread their operations throughout the world and compete on a global level, enhancing competition and improving the efficient allocation of resources.
Today, we believe the strength advantages of these global companies over their regional counterparts is more defined. Since the last stock market peak in 2007 (the same year as the latest edition of Friedman’s book), the MSCI All Country World Index has performed well and shown a strong recovery following the 2008-2009 global financial crisis.
So given the strong relative performance of global companies over the past few years, why do investors still restrict themselves to outdated, domestically oriented portfolios? After all, the benefits of “going global” extend far beyond simply enhancing the return potential and diversification qualities of a wider portfolio.
In many cases, even in the case of large domestic multinationals with diverse revenue streams, we believe it may be more appropriate to own a subsidiary of a company, since there might be price differentials or different regional growth outlooks. In our opinion, a global mandate gives an investment manager the freedom to do this, thereby potentially offering greater value to an investor.
An additional feature of a global mandate is that it cannot be imitated at a regional level. Global managers have the ability to control risk by favoring not only particular sectors but also regions. A regionally focused portfolio does not typically have the same level of flexibility, even in challenging economic environments.
At Aberdeen Asset Management, our global equity strategy is built around a high-conviction “best ideas” approach designed to allow our global equity team to capitalize on the expertise of our regional equity research teams. We apply a bottom-up investment process, based on disciplined evaluation, which relies on the thousands of company visits made by regional equity managers. Our equity teams never invest in a company without having first met the management of that company, and if we don’t like a stock, we won’t invest in it—irrespective of index weight. The result is a portfolio consisting of quality global companies with strong balance sheets and solid business models that we believe will prosper over the long term.
The rate of change in the world appears to have accelerated over the past decade. Stronger relations have developed among countries; many former single-pillar companies now operate as networks of subsidiaries throughout the world; and most recently, the Internet has enabled information to be shared anywhere with the click of a button. As Friedman says, barriers have been broken down. In our view, we no longer live in a sheltered world, and an equity portfolio shouldn’t either.
Stephen Docherty is head of global equities at Aberdeen Asset Management, managing a team of 15, including six senior global equity investment managers responsible for Aberdeen's overall strategy towards Global equity investment, including ethical portfolios.