It’s been over 10 years since I attended my first ever Global Investment Conference as the newbie editor of Canadian Investment Review. It was 2001—as I met plan sponsor delegates for the first time, I heard them talking about one big idea that emerged during the two-day event: contagion. Several speakers bandied this term about as they raised concerns over rising market correlations and the declining importance of international borders for investors.
In fact, 2001 turned out to be a watershed year for contagion in global investing, with international markets reacting to the events of September 11th in lockstep. Today, contagion is firmly planted in the risk management lexicon for plan sponsors.
With market correlations at all time highs, investors today now use industry and sector factors, not borders, to make their global investment decisions. The ETF space has been good at delivering products to help in this respect. Indeed, ETFs have turned out to be a good way to access global niches like small cap—an area plan sponsors have shown interest in recently. Small caps are a great way to achieve what some argue is a “pure play” on local economies—they’re more likely to be impacted by local events than their large cap counterparts are and they tend to reflect country-specific factors like demographic trends.
Investors will soon be able to refine their small cap approach even further as iShares gets ready to launch a series of new small country small cap ETFs focused on countries like Australia, Germany, the UK and South Korea. In today’s borderless investment world, a little slice of small country small caps ETFs provides an interesting path to global diversification—where country-specific events actually have an impact on growth prospects for the underlying stocks.
As global market correlations continue to grow, investors need to look at smaller and smaller sections of the global investment pie to get their diversification. Small country small cap stocks could just fit the bill.