The regional exposures of global equity managers should be considered on a source-of-revenue basis rather than a domicile basis, as this gives a more accurate picture of a portfolio’s true risks, according to new research from Massachussetts Financial Services (MFS).

“As more and more of companies’ income is derived from sources outside of their domicile, it may be misleading to look at issuers’ domiciles to determine a portfolio’s exposure around the world,” say the authors of the MFS study, global equity portfolio manager Ben Kottler and quant analyst Douglas Hayes.

“Large multinationals, such as Nestle, Exxon, or Toyota, already earn the majority of their revenue from outside of their home region. In addition, revenue numbers are regularly updated, and unlike other financial data, such as profits and assets, the figures are, for the most part, consistently defined (and rarely manipulated) around the world.”

Global accounting rules do not prescribe how companies should report their regional revenue splits or even provide strict definitions of the regions themselves, so MFS performed its analysis using data from two investment banks as well as its own, and did not consider locations of factories or offices – because “a financial business may have offices located in major financial centres yet still derive most of its income from its home country.”

MFS’ analysis of its own flagship global equity portfolio found that an apparent underweight to the US was significantly reduced if the portfolio was considered on a revenue source basis, while an overweight to Europe was lessened.

For instance, an apparent dominance of European-domiciled companies in the portfolio’s pharmaceuticals exposure is actually an American play in revenue terms, given that country’s huge domestic drugs market. Interestingly, MFS found that even global equity portfolios benchmarked to the MSCI World and forbidden to invest in emerging markets were exposed to them anyway on a revenue source basis – to the tune of nearly 5 per cent.

While admitting that the lack of standardisation around reporting meant it was still not practical to provide fund reporting based on revenue source, Kottler and Hayes said it should still be a high-level consideration for investors.

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