That’s the verdict of Sarah Ketterer, portfolio manager and chief executive officer at Causeway Capital Management, based on an analysis of popular international stock indexes. “We don’t think any fund is what it purports to be geographically,” she says.
An index or mutual fund might advertise itself as focused on a particular part of the world — emerging markets, Asia ex-Japan, developed markets, and so on. Yet the geographic breakdown of holdings a mutual fund provides to investors are based on where a company is headquartered, not the countries where a company actually gets its revenue.
“Where companies are listed has very little to do with where the economic risks [to their businesses] are,” says Ketterer, whose firm manages $12.2 billion in assets. An extreme example: British American Tobacco. Despite its name and its London headquarters, the 48.5-billion-pound ($78 billion) company sold just 17 percent of its product in Western Europe in the first nine months of 2010. Its fastest growth comes from emerging markets in Asia.
Nonetheless, British American Tobacco is a member of 200 stock indexes and nearly all exclude Asia and emerging markets by focusing on the United Kingdom, Europe or developed markets.
Among mutual funds, consider one popular option—funds based on the MSCI EAFE Index, which includes only developed market stocks outside the Americas. Causeway estimates 17 percent of index companies’ sales came from North America, and almost 10 percent from emerging markets. In other words, more than a quarter of the index’s exposure comes from outside its core focus.
“The more multinational companies are, the more confusing it is to investors,” Ketterer says. She expects such geographic distinctions to blur further as companies continue to benefit from strong sales growth in emerging economies like China, India and Brazil, while the economic growth in developed markets in Europe and North America remains slow.
No one is suggesting such international exposure is a bad thing. Many companies in developed markets – and their shareholders — are profiting from emerging-market exposure. It does, however, complicate the tasks of investors and financial planners who want to carefully spread their risks across the globe. Adding to the confusion, there is no standard way that companies report international sales. Some decline to provide any detail at all.
Standard & Poor’s senior index analyst Howard Silverblatt, a contributor to this blog, does an annual estimate of the overseas exposure of the S&P 500, which includes only U.S. companies. Last year, he found 46.6 percent of the S&P 500’s 2009 sales came from outside the U.S., but those figures only include the half of the index that actually discloses such data.
Geographic analysis by revenue for prominent indexes is hard to find, but such analysis is nonexistent for almost all of the thousands of mutual funds or exchange-traded funds marketed to investors. (Causeway did conduct a similar analysis of its own Causeway Global Value and Causeway International Value funds, finding both developed-market funds had 10.7 percent exposure to emerging market sales.)
Clearing up this confusion will take time, but Ketterer predicts investor demand could force clearer company disclosure and more geographic analysis of fund holdings. “In ten years, that’s how this will be reported,” she says.