The Olympic ceremonies and games in Beijing serve as a colourful reminder of the diverse opportunities available by taking a more global view to investing. Apparently the audience has been instructed to cheer for all contestants equally. If only investing were that egalitarian!
Many years ago, on a visit to Hong Kong, I came across a historical plaque that described how China had ceded the New Territories to the United Kingdom for 99 years. It occurred to me at the time that while that might have appeared to be a long time horizon for the British, it was probably viewed by the Chinese as being a short-term loan. When dealing with foreign countries, as with investing, time horizons matter.
Understanding cultural differences is just one of the fascinating aspects of making global investments. (One insurance company selected phone numbers with digits that signified “sudden death” for some of their potential Asian customers.) While few of us need to worry about cultural differences to that extent, we may all need to consider what a global approach might mean to portfolio construction and design.
One obvious advantage of a global approach is the ability to select the best investments within each sector or asset class on an unconstrained basis. This would appear to lend itself to a global search for the best available alpha.
From a market risk perspective, there may not be as much benefit from global diversification as historical data would imply, although there are some interesting examples of foreign markets that show very little correlation with our traditional turf.
Other issues to consider include:
• The cost, risk and lack of liquidity associated with foreign currency hedging;
• The need to assume currency risk along with investment risk, when hedging is not practical;
• The possible difficulty in exiting from international investments;
• Unfamiliar legal or regulatory environments; and
• The potential for significantly higher transaction costs.
Even major financial institutions with extensive resources often prefer to work through local partners who provide them with the necessary expertise and contacts to navigate in foreign jurisdictions. As is often the case, nothing beats the value of years of experience.
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However many new players are becoming more involved in these markets. In public equity markets, it appears to be becoming more and more difficult to exceed foreign benchmarks, which may be indicative of these markets becoming more efficient, or at least more fully explored.
Appetite is building on the fixed income side as well, where many emerging markets appear to have emerged, with credit ratings climbing up to investment grade status—witness Brazil’s entry to the club, thanks to its commodities sector.
All of the signals point to the benefits of global opportunities, although there are certain examples of poor execution, such as the pension fund that explored emerging markets for one year only pulling out just in time to lock in disastrous results. But as with many investment opportunities, there is no return without an adventure. The whole planet is our playground.