The Meb Faber Show - Better Investing The Best Investment Writing Volume 4: Alec Lucas, Morningstar – A New Perspective on Geographical Diversification
Nov 2, 2020
Alec Lucas, a senior analyst at Morningstar's Manager Research Services, dives into the intricacies of geographical diversification. He explains how relying solely on a company's domicile can mislead investors, revealing mismatches between revenue sources and country classifications. Using examples from Philip Morris to Millicom, he highlights the significance of revenue-based analysis. Lucas also discusses the effects of market caps on international revenue exposure and shares insights on home-country revenue biases, making a compelling case for more nuanced investment strategies.
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Domicile Can Mislead On Where Firms Earn
- A company's domicile often misstates where it actually earns revenue because multinationals generate sales globally.
- Revenue-based geographic measures reveal the true economic exposure of firms and portfolios.
Multinationals With Surprising Revenue Sources
- Philip Morris and GlaxoSmithKline are large index constituents despite minimal home-country revenues.
- Millicom's domicile classifications fail to reflect that it earns over 85% of revenue in Latin America and Africa.
Revenue Weighting Shifts Country Importance
- Revenue-weighting boosts China's share dramatically versus domicile measures and reduces the U.S. share.
- The U.S. still dominates absolute global revenue despite its relative drop when using revenue data.