Building Investment Portfolios: Think Globally, Invest Locally
Ronald M. Florance, Jr., CFA, has some simple advice for investors: Locate the consumers of the future.
Florance, a private investment consultant and founder of RMF Consulting, explained that positive investment returns come from correctly identifying how economic trends will play out over time.
“When we think about global investing, it’s not about ‘Where’s the opportunity today?” he said during his presentation at the CFA Institute Latin America Investment Conference. “It’s ‘Where’s the opportunity going to be tomorrow?’ and positioning ourselves appropriately for that.”
For Florance, appropriate positioning means investing in multiple countries.
He pointed out that investors do not gain the full benefits of diversification if they restrict their equity investments solely to United States stocks. Why? Because those only account for half of the total market capitalization of all globally listed equities. Holdings in other asset classes, including fixed-income and alternative investments, also suffer when there’s a similar lack of diversification.
During his presentation, Florance repeatedly stressed the importance of making the most of globalization by constructing a globally diversified portfolio.
“People talk now like globalization has just happened in the past 10 years,” he said. But globalization is the sharing of ideas and the movement of people and commerce, according to Florance. By that criteria, it has been going on for much longer than the last decade. “It’s basically been going on ever since creatures could move,” he said.
What distinguishes globalization today is the speed and scale at which production and distribution capabilities are developed across the world.
However, the current political landscape may create difficulties for cross-border trade. “We have this nationalism thread going around the world,” Florance said. “These people are not opening doors, they’re closing doors.”
This could lead to problems because it “reduces economic opportunity, reduces economic activity, and causes friction.”
But the new political landscape does offer opportunities for investors. “We need to start really paying attention to local manufacturers and local distributors, because they’re able to get to local consumers a lot faster,” Florance said. Taxes, tariffs, and shipping delays will increase the perceived cost of products delivered by large global companies.
On the demand side, Florance expects consumers to be more discriminating. Thanks to modern information infrastructure, they are smarter and better informed than ever. “They know what is the fair value of a product, and they’re able to do that research,” he said. “So it’s impossible to keep that a secret anymore.”
This means that investments in local producers, those who can meet local consumer demand more efficiently, could deliver substantial gains for investment portfolios.
Florance does not expect developed market economies, especially in North America and Europe, to see a major boost in consumer spending. The slogan “Reduce, Reuse, Recycle” popularized in the US describes how these consumers are consciously looking to limit their activity. “They have bought, and eaten, and worn everything there is to buy, eat, and wear,” Florance said. This makes investment opportunities in their countries less attractive.
Some investors may hesitate to leave the perceived safety of developed markets, but Florance stressed the importance of working with these clients to overcome their home country biases.
“That’s our job in international investing,” he said, “helping them get beyond their comfort zone.”
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: CFA Insitute