(April 10, 2012) — At a time of economic crisis, investors should be aware that where a stock is listed may have little to do with its operation and revenue, and pulling out may do more harm than good, Russell Investments has advised.
The consulting firm said just because a stock is registered in Europe, which has been experiencing significant decline for a couple of years, selling out of a position could mean investors lose return potential and diversification benefits.
Mike Smith, consulting director for Russell Investments’ United States private client consulting services group, said: “Nine of the ten US largest companies in the Russell 1000 Index derive significant portions of their revenue outside the country – on average, more of their revenues come from outside the US than within.”
The story is the same throughout the developed markets, as companies have flocked to stock exchanges where investors are keen to allocate capital due to high corporate governance standards.
Smith said the percentage of revenue generated by European companies outside their home country is even greater than companies listed in the US.
Last year, some 40% of companies listed on the Alternative Investment Market, London’s platform for small, growing companies, drew revenue from and operated outside the UK.
The smaller market followed the trend occurring on the main exchange, which is home to several large companies that have offices in the UK, but operate in and draw revenue from elsewhere.
“In today’s economy it is not practical, and maybe not even possible, to “protect” one’s portfolio from European bad news. US corporations generate significant revenues from Europe. Apple, which is now the largest company (in market capitalization) in the US stock market, generates 25% of revenues from Europe. Leading European companies tend to generate even larger percentages of revenue outside their domestic borders. Domestic limitations are disappearing in today’s economies, just as they should in today’s portfolios,” Smith said.
He advised investors to look beyond national borders and embrace globalisation as companies look beyond these parameters for growth.
“Reframe the focus of decision making. Portfolio decisions should not be US. vs. Europe, or US vs. international. Decisions should be based on identifying the best investments available, regardless of location and hunt for bargains as one does in every other aspect of life,” Smith advised.