There are many different funds available to the mindful investor, each offering their own respective pros and cons. Some are better than others.
The difficulty is, it can all get a bit confusing if you aren’t familiar with the terrain. One example is global equity investing. What is it, and how does it help your portfolio?
In this article, we’ll be defining what global equity investing is and why we feel it’s important to consider this when constructing investment portfolios.
Global equity investing: an overview
To get one part of the definition out of the way, “equities” is a term often used for “stocks” which are shares in a company that are typically traded on the stock market.
You can invest in equities (or stocks) individually, by picking a specific company and buying one or more of its shares. This might be a UK-based company, in which case you would be buying a domestic equity.
The other common, less-risky route is to invest in equity funds. This is where you pool your money with other investors into a collection of companies. If the companies are based in the UK, then the fund can fairly be described as a domestic / UK equity fund.
If the fund comprises of businesses which are based abroad, however, then the fund is no longer domestic and might take on another name. For instance, if the companies are based in Western Europe then the fund’s name might be “Western Europe Equity fund”.
Accordingly, a fund comprising businesses from developing countries might be termed a “developing world equities fund”. It might even pick other companies to join the fund, provided they are companies which are based in what is commonly-accepted as “the developing world.”
This is where global equity investing starts to come to the fore. Global equity investing is where you include investments in businesses from outside the UK into your portfolio. As such, a global equity investment fund therefore can pick businesses from across the world.
What’s the value of global equity investing?
The main benefit of a global equity investment fund is that it is not limited to the domestic or regional market when it comes to asset selection. Instead, it can pick the most attractive markets – and stocks – from across the world and include them.
As many people know, certain regions or parts of the world excel in particular sectors of the market. Switzerland, for instance, has a strong reputation for banking and drugs manufacturing. Australia is renowned for its mining businesses. The UK, USA and Israel are making a name for themselves in cyber security, and parts of Asia are excellent for technology.
The manager of a global equity investment fund can survey the world’s markets and pick the strongest companies from the strongest sectors. In addition, fund managers can identify the sectors of the global economy which historically perform better at certain times of year, and tailor their fund planning/strategy accordingly.
As always when it comes to investing, it is important to consider the risks as well as the positives when looking at global equity investing.
One risk to factor is currency fluctuations. For instance, a strong pound against foreign currencies (e.g. the dollar or yen) will result in lower international stock values when these are converting into pounds.
Another risk is the potentially higher volatility (i.e. swings up and down) experienced by certain international stock markets. China and Venezuela, for instance, have often shown themselves to be more volatile markets than Germany or France.
Balancing global equity investments
Many people can get nervous about global equity investing, particularly due to “home bias”. This refers to investors’ natural tendency to invest in stocks from their home country, even when faced with strong evidence that diversifying abroad would bring great benefit.
An important balance needs to be achieved by the wise investor. On the one hand, you do not want to take needless, excessive risk when investing in overseas markets and businesses. On the other hand, you do not want to miss out on some great potential returns that are often hard to achieve elsewhere.
When it comes to discerning how to integrate global equities into your investment portfolio, this is where we come in. As experienced Financial Planners we can identify the risks and opportunities, as well as having the resources and means available to construct a solid investment strategy for you.
In 2014, Vanguard delivered some fascinating research. It showed that in 2013, nearly 50% of the global equity market resided in the United States. Yet at the same time, mutual fund managers in the U.S. held only 27% of their equity allocation in funds not domiciled in the U.S.
Certainly this illustrates the subject of “home bias” quite nicely. Yet it also brings an important issue to the fore. Investors who concentrate their investments in their domestic market (e.g. the U.S. or UK) are arguably taking a big risk, because they are subjecting all of their equities to domestic economic and market forces.
If that domestic economy declines or even crashes, then all of the equities in that investment portfolio are exposed. If, however, an appropriate amount of global equities are incorporated into the mix, then these equities will likely not be as affected.
Indeed, the Vanguard research cited earlier even suggests that adding a prudent amount of global equities can reduce the volatility of an investment portfolio. That said, this is not an objective fact and all investment portfolios are different. Indeed, two investment portfolios will likely perform differently within the same time period, even with a similar percentage of global equities comprising the mix.