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How global are you?

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Not all Global Equity indicies are truly global and here is what it means for investors.

We start this Perspectives piece with some sad news: Brazil isn’t part of the world anymore. Which is tragic news for those living there and one has to wonder what sort of visas they will require of us for those that attend the 2016 Olympics there. It turns out that China also doesn’t make the cut to be part of the world – someone should really let the 1.4 billion people there know.

So what are these nonsensical ramblings that Morphic is penning? It has to do with what is and what is not in the “World” Indices that many global equity funds that are sold to investors in Australia follow. And the question is what countries the investors are really getting exposure to when they buy a product off a global equities manager. We’d hazard a guess that most investors don’t know that not only are Brazil and China excluded from their funds, but so are South Korea, Taiwan and many other countries that most people would consider to be part of where their manager looks to find them stocks for their “Global Equities” portfolio.

A quick history tour will help give some context. Back in 1986 when Morgan Stanley Capital International (MSCI) created the “World Index” for American investors, global investing was realistically limited to a handful of countries in Western Europe, US and Japan.

Globalisation, and 30 years of economic development, have made this arbitrary decision far less relevant. To say Taiwan with its income per capita near Australia and home to some of the largest technology companies in the world, should be analysed separately to US technology stocks seems odd, maybe even quaint, in 2015. Indeed, a newer “All Country World Index”, one that Morphic follows, gives a better representation of global opportunities. See the map below showing what investors miss out on by sticking to the old index.

We believe that being a truly global investor gives a better opportunity to invest in outstanding companies – wherever they may be. Majority of the products sold to Australian investors are benchmarked against the old MSCI World Index. So investors who are going into “Global Equities” in Australia are only getting stocks in certain parts of the world rather than a true global product.

MSCI world index