Globalization: The Borderless Pursuit of Happiness

“Globalization is a powerful force, ever present in our daily lives. Nowhere has it been more felt than the investment world, where cross-border trade and the continued rise of corporations mean that we need to look beyond our domestic markets to maximize portfolio returns.”

By Paul D. Ehrlichman,  Managing Director, Head of Global Equity

The Globalization Phenomenon

There's nothing new about the concept of international trade — ancient man was sailing his trading vessels around the Mediterranean thousands of years ago. Globalization has been making its presence felt in our lives for many years now. By its very nature, it is making country specific investing less and less relevant. More and more, investors need to be looking at the world in terms of 'people' and 'companies' versus focusing on 'countries.' As a large part of corporate profits are now being earned outside of domestic economies, it's becoming increasingly important for companies to be mindful of what's going on in the rest of the world when developing their businesses, services and products.

For companies that are successful in their home market, exporting their proposition abroad is often the next step and with continued removal of trade barriers between countries, larger multinational corporations are selling their products and services across a wider range of countries and territories than ever before. The emergence of new economic superpowers from the developing world is compounding the issue. Asia, for example, is benefiting from globalization as western companies increasingly outsource their manufacturing and servicing operations to countries in the region.

Globalization in Practice

In short, globalization is being driven by factors such as dismantling trade barriers, the creation of the Eurozone, and the emergence of Asia's industrial superpowers, which has literally brought billions of people to the global market place. Moreover, the cost of doing business, including transportation and the distribution of information, has fallen significantly since the arrival of the internet. Today our world is more interdependent and integrated than it has ever been before. From a corporate perspective, some companies are benefiting from globalization more than others. This is why analyzing companies against their competitors across the world is so important; it allows for the very best stocks to be picked regardless of geographical location.

For many large companies, production can now be broken down across national borders with different countries specializing in the production of different components. It has become possible for a European company, for example, to originate a product, have it made in Asia and then have it distributed in North America. Taking a global perspective can help to boost profitability by enabling a company to allocate its resources more efficiently. Over the last 20 years, industries' production has become increasingly international. For example, Toyota has factories in most major continents. Moreover, modern technology enables globalization to penetrate the service sectors more deeply.

In their thought provoking book 'Our Brave New World,' Charles Gave and members of his research group reveal the emergence of a new business model — the platform company. This new conception is a multinational firm that organizes but does not own the production and distribution of products and services. Platform companies focus on knowledge based activities while letting other companies, often from the developing world, handle the production of the product. In short, the manufacturing aspect of the process tends to be low margin and very competitive. Platform companies outsource the 'volatile' portions of the business to become leaner, more productive — and ultimately more profitable. The platform company is the driving force of globalization and marks the eventual demise of the traditional vertical model — design, produce, and sell.

Globalization's Next Phase

So how does an investor capitalize on global opportunities, both today and tomorrow? Basic investment theory suggests that you should diversify your assets in order to reduce risk and increase returns. Yet many investors continue to concentrate their assets in their home market. But if you restrict yourself to investing domestically, you're potentially missing out on the investment opportunities elsewhere in the world. For example, the U.S. market currently represents approximately forty percent of the world's market capitalization; so the rest of the world is at least one and half times as large as the U.S. Stock Market*. Investors who limit their investment universe to a single country may be missing out on a large number of global investment opportunities. Thinking globally and looking abroad offers a wider selection of industries and stocks, and can also help spread risk as different markets tend to perform well at different times.

The competitive advantages of today's leading global companies will become imperatives tomorrow. The best global companies will know what the customer wants and where the producers can be found — and have the 'now how' and the capital to seize the opportunity quickly. Innovation will be the key to creating value for customers. Collaboration will be the credo of successful entrepreneurs and the power of networks will drive their success. The mavericks of the next phase will master 'insourcing' of other people's ideas, knowledge and talent.

As we position our portfolios for the next phase of globalization, the investment team at Global Currents will be focused on several key areas of alpha potential:

• Companies that benefit from global growth
• Companies with strong market position
• Companies where growth is not solely driven by price increases and high operating leverage

We apply an all capitalization, all country focus that seeks to identify and capture great companies across the world's financial markets. When we build our portfolios correctly, the stocks within represent a series of positive accidents waiting to happen. In practice, over long periods of time, our contrarian approach has preserved and grown our clients' capital — and that is the best measure of our success.

*Source: MSCI All Country World Index, 2008.