Broader Horizons, Better Returns?

Grab your passport: higher investment returns can be found abroad.

Investing outside one’s own backyard would improve institutional investors’ returns—but most in the US refuse to do so, according to a white paper by Portfolio Evaluations.

The investment consulting firm said although 75% of the largest investible companies were found outside the world’s largest economy, many in the US remained insular in their asset allocation.

“In keeping with longstanding practices, many plan sponsors continue to maintain 80% or more of their equity allocation in domestic stocks, despite the fact that the geography of the investable landscape has changed,” the paper claimed. “US companies presently account for only about half of the total global market capitalization and a far lower percentage of revenue.”

The consultants showed that the number of “investible” countries—those that host these large companies—has risen from 18 in 1970 to 45 in 2010. They added that those investors who have refused to adapt their investment strategies to take into account this change would have already missed out on growth rates that rocketed in some emerging markets over the past 30 years. By allowing these “new” countries in to their portfolio, investors would now be able to capture some of the growth, but they have missed out on the boom time.

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“Most economists predict that population growth over the upcoming decades will be weaker than it has been in the past. Over the past few decades, several countries have benefited from rising populations of working-age people,” the paper said. “While many emerging and developing markets will still have strong population growth (with China being a notable exception), developed countries (with the exception of the US) will have contracting working age populations.”

The consulting firm predicted that although developing economies had only made up 25% of global GDP in 1990, by 2030, this figure was more likely to be around 48%.

“With the global economy becoming more integrated from a revenue perspective, asset allocation strategies focused on a global opportunity set to add alpha, are best positioned to take advantage of changing trends,” the paper warned.

However, before making any changes, investors should examine the businesses they already hold, the consultants said.  

“Although many companies generate their revenues outside of their country of domicile, many investors maintain an asset allocation based on a traditional boundaries approach, which may misrepresent the risks within the overall portfolio.”

About half of the revenues of companies in the MSCI All Country World Index are now generated outside of the US and developed Europe, the paper claimed. “Those revenues are largely generated in emerging markets despite those markets only representing 11% of the world’s investment opportunity based on market cap.”

The full paper is found on the consultants’ website.

LSE Buys Russell Investments for $2.7 Billion

The acquisition is expected to bolster the London Stock Exchange’s index business and help establish its presence in the US markets.

The London Stock Exchange (LSE) has struck a deal to purchase Russell Investments for $2.7 billion from Northwestern Mutual Life Insurance Co. 

Buying Russell’s index and investment management business is expected to help LSE launch into the US markets and establish itself as one of the world’s biggest index providers.

“The acquisition of Russell is another significant milestone for [LSE],” Xavier Rolet, chief executive of LSE, said in a statement. “It sits squarely with our diversification strategy, builds on one of our core strengths in intellectual property, and provides another key driver of growth by growing our presence in the US, the largest global financial services market.”

The company announced that the deal would bring together $9 trillion in benchmarked assets—over $5 trillion from Russell and $4 trillion of equities from LSE-owned index operator FTSE—creating a “[number] two player in US-listed exchange-traded funds” comparable in scale with MSCI.

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“With this acquisition we are strongly positioned for the changing dynamics in the global indices market with a best in class offering, which we believe will help deliver outstanding returns for our shareholders,” Rolet said.

Len Brennan, president and CEO of Russell, also said the firm was looking forward to joining forces and creating a powerful index presence: “The combination of our index business with FTSE creates a truly global index leader, with a highly complementary fit of products and distribution capabilities and a unique position as a leader in major domestic market benchmarks as well as international equities.”

LSE announced it was looking forward to growing its investment management business, particularly capitalizing on Russell’s expertise in multi-asset solutions and passive strategies. Through an extensive review of the Seattle-based firm’s asset management business, Rolet said LSE hopes to “determine [Russell’s] fit with the group” and preserving its focus on client service, fund performance and management, and employee stability. The firm has $256 billion in assets under management.

“LSE and Russell are two of the most highly respected financial services firms in the world, and this joining of the two organizations offers many strategic benefits,” Brennan said. “Russell’s investment management business has been a pioneer in innovation in the areas of passive management and smart beta and incorporating such strategies into our multi-asset solutions, and we are committed to maintaining the highest standards of client continuity and service.” 

Brennan will remain chief of Russell and will join LSE’s executive committee upon the deal’s completion.

The exchange said it plans to raise $1.6 million of the purchase price through the net proceeds of the rights issue and will finance the remaining price from existing and new bank debt. It also said it expected to see $78 million in annual cost savings within three years following the deal.

The acquisition is expected to be finalized by the end of 2014 pending shareholder approval, LSE said. 

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