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© Copyright 2000 Rogers Media. The following article first appeared in the July 2000 edition of
BENEFITS CANADA magazine.
Sector investing
The world is getting smaller. But does that mean countries don't matter any more?
By Barbara Clapham
It wasn't too long ago that global investing simply meant picking countries that were expected to
outperform the rest of the world, and allocating money accordingly. Traditionally, a money manager would
invest in a broadly based group of securities in each country so that the performance of their portfolio
would reflect the economic growth of the countries.
Some question whether this approach is the best way to invest in global markets, or if greater emphasis
should be placed on investing in certain sectors instead of specific countries. These investors tend to
believe that world markets are becoming more integrated and opportunities to find value are increasingly
found in particular industries. For instance, the technology boom has been a worldwide phenomenon.
In-vestors who excluded new economy companies from their global portfolios in 1999 showed the same under-
performance as those who followed this strategy in domestic markets.
PERCEPTION IS REALITY
It's true that certain world markets are converging in terms of their economic performance and market
activity. Europe is the example most often used, and terms such as eurozone and euroland tend
to reinforce this view. However, although the trend is towards integration, the continent is not moving as
one market yet. There are still enough significant economic, regulatory and political differences among
nations for country allocators to add value.
Germany, for example, plans to enact tax changes next year, lowering taxes and exempting capital gains that
stem from the sale of a stake in another company. These changes, along with corporate reforms, are expected
to increase consumer consumption and enhance shareholder value. Other European countries are still
grappling with unstable political regimes.
The jury is out on whether country allocation or sector investing produces better results. From a
historical perspective, countries are important relative to sectors. However, at the present time the
popularity of sectors seems to be on the rise. Is this a reality or a trend driven by perception?
According to Peter Rathjens, managing partner and chief investment officer at Arrowstreet Capital in
Boston, Mass., it doesn't really matter if markets are becoming more correlated or not--it's the perception
that counts.
"Ten years ago there was very little evidence that active managers were forming portfolios on the basis of
liking some sectors and disliking others, and five years ago they were just starting to," he says. "What
appears to have changed is a belief, justified or not, that the world is becoming more integrated."
Rathjens points to the Economic and Monetary Union (EMU) and the globalization of individual companies such
as DaimlerBenz's takeover of Chrysler and the merger of Mannesman and Vodafone as valid reasons to adopt
this belief. On the other hand, the opposite situation is occurring in Russia, Eastern Europe and other
parts of the world. These areas are showing increased balkanization rather than integration.
As long as active global managers are adopting a sector style of investing, this is where the opportunities
will be found. Rathjens explains, "We are just trying to find mistakes, and if people are making mistakes
across sector dimensions, overweighting some sectors and underweighting others in an ill-advised way, then
those are the opportunities we have to exploit as active managers."
Barbara Clapham is a contributing editor with benefits canada.
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CONFERENCES
The Association of Canadian Pension Management (ACPM) Annual Conference
Sept. 19 to 22, 2000
Château Mont Tremblant, Québec
With sessions on topics such as institutional activism, communications in a cyber world and global
pensions, this conference focuses on the financial well-being of Canadian pension plans. Call (416)
964-1260 or e-mail acpm@interlog.com.
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