Survey the global landscape to best exploit business trends

Rising correlations between U.S. and non-U.S. equity markets have weakened the diversification benefits of international investing.

Meanwhile, the increasing pace of globalization and interdependence between economies has paradoxically made global equity funds more relevant than ever. Without taking the global landscape into consideration, it's difficult to properly exploit business or economic trends, identify the world's most attractively valued companies or assess the prospects of domestic companies.

By removing regional constraints, global equity portfolios can reduce home bias and invest in high conviction ideas, whether they be in developed or emerging markets, different sectors, styles and/or market caps.

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Successful international investing hinges on the ability to manage indirect exposures, as well as direct country exposures. Often a company outside a particular region stands to benefit most from growth in that area.

The ability to overweight or underweight regional economies has become much more complex as the lines between domestic and international blur, a knock-on effect of increased globalization.

The more managers on a plan's roster, the more difficult it is to detect unintended exposures and monitor them at the total plan level. Such exposures can be significant.

For instance, a pension plan's emerging markets manager might be overweight China at the same time that its U.S. large-cap manager is overweight a major global technology stock with significant sales there. As companies' domiciles become less meaningful, the risks of unintended global exposures increase. S&P 500 companies now generate barely half of their revenue at home.

"Robust quant screens, coupled with fundamental research to understand the drivers of growth and cash flow, work the best across the broadest possible data sets. And there's no broader data set than the global universe of stocks."

Indeed, one of the most attractive features of global equity as a single asset-class solution is the freedom it gives managers to exploit market inefficiencies and capture idiosyncratic alpha opportunities. This is significant in a stagnating global economy, in which markets can become dysfunctional and volatile due to increased central bank intervention.

It's more efficient to manage and monitor unintended exposures at the portfolio level versus the plan level. Advances in available data on local markets around the world have made it more feasible to do so.

However, because long-only global equity mandates are still benchmark aware, finding tracking error is easier and less costly at the plan level than it would be, say, with a benchmark-agnostic, unconstrained global hedge fund strategy.

By entrusting portfolio management to a global equity manager that has the investment expertise and resources to closely monitor economic exposures of the portfolio and conduct the necessary rebalancing and tactical shifts, plan sponsors can focus on more strategic issues such as managing the plan's liquidity. This also reduces their need to dovetail the approach of domestic and international managers across investment styles and sectors.

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I believe an ideal way to determine global weightings is to combine a global outlook with company-by-company analysis. Moreover, robust quant screens, coupled with fundamental research to understand the drivers of growth and cash flow, work the best across the broadest possible data sets. And there's no broader data set than the global universe of stocks.

As globalization continues to intensify, a growing number of institutional investors are considering moving away from a partitioned domestic/non-domestic approach to equity investing to an integrated global process.

In my opinion, it has never been more important to allocate to actively managed global equity portfolios that have the research capabilities and expertise to make tactical asset allocation decisions across the global market portfolio and monitor indirect country exposures.

— By Ram Gandikota, senior portfolio manager and associate director of research at Ativo Capital Management