For instance, for UK’s benchmark FTSE 100, with companies including Standard Chartered, Aberdeen Asset Management and Glencore, about three-quarters of revenue are generated from outside the country. Yet the benchmark labels them as UK companies due to domicile or place of listing.
The MSCI World Index states that it represents companies across 23 developed market countries. But 21% of their overall revenue is driven from emerging and frontier markets, said Budden, speaking at the recent FSA Growth Forum in Hong Kong.
As a result “traditional overweights or underweights don’t tell the full story”, he said.
Therefore when it comes to portfolio construction, the geographic building block should be replaced by other factors such as where revenue and profits are derived from, he said.
He pointed out that 30% of the revenue of companies in the Capital Group New Perspective Fund is sourced from emerging markets, but only about 8% of companies are domiciled there.
As examples, he cited Danish pharmaceutical firm Novo Nordisk as well as South African media company Naspers, which holds a 34% stake in Chinese internet giant Tencent. Both derive significant revenue from China and are in the fund’s top 10 holdings, according to the latest factsheet.
One of the reasons for holding these companies instead of domestic Chinese companies is that some mainland businesses do not act in the best interests of shareholders.
“Tencent doesn’t yet have a long track record of corporate governance. We don’t fully understand what Tencent’s management would do, and how they would behave towards shareholders,” Budden said.
Volatility prevails
However, multinational share prices are still vulnerable to headline news. “The pharmaceutical firms have been weak this year after a strong performance in 2015, partly because of the concerns that the to-be-elected US president would restrict the prices of the drugs in the US.
“[Novo Nordisk’s] stock price still got hit even though it has smaller revenue driven from the US market.”
Budden believes that volatility is an opportunity to buy more because “over a period of time, we observe that the stock price will always follow the earnings growth”.
On that note, the biggest risk is that investors no longer value growth.
“Last year, we saw a market where investors valued secular growth. Companies that did well were the ones that had good long-term growth stories.
“Moving on to 2016, the market now values safety. If we are truly going through a significant change in market leaderships, where investors are so worried about the uncertainty that they just pay for safety, it would be a big risk for us.”
