Episode Transcript
Indrani: Hello and welcome to FTSE Russell Convenes. I am Indrani De, Head of Global Investment Research, FTSE Russell and I’m excited to talk to Dan Muzzarelli from Franklin Templeton. He's the Global Head of ETF Distribution. We'll talk about global exposure. Welcome Dan.
Dan: Thank you Indrani. Glad to be here.
Indrani: So let's start with something that's very basic in the world of economic theory and empirical finance. Empirical finance says almost all investors have a home bias and economic theory says we should reduce the home bias, which really comes to the question of why global exposure. What are your thoughts as you see this topic?
Dan: Yeah, I think it's really been an interesting 15 or so years. If you look at post financial crisis, you had a period of US exceptionalism. Equity returns in the US have been phenomenal, so it's easy to see why investors may have forgotten a bit about the world outside of their own home country.
You know, it's certainly something we've seen quite a bit and I actually watched it in client conversations over the course of the last call it 15 years where back post financial crisis, it might have been 15 or 20% allocated outside the US for US clients specifically and then, I mean, as early as 2023 we saw that number below 5% for some clients, which again, for somebody who's been in the industry a while, pretty surprising.
So again, from a US perspective, the period of exceptionalism was actually drawn, driven by a lot of solid fundamentals. So no surprise that people sort of stayed in, let winners allow to run.
But I think the difference here over the last couple of years is, investors have sort of taken a step back and I think re-evaluated their own portfolios, thinking through not only those biases, but then looking at returns and the opportunity set outside of their own home country. Obviously your home country biases are very comfortable but I think when you look at it from a portfolio perspective and the diversification necessary to sustain volatility, which seems to be very persistent of late, it gives you the opportunity then to look outside of the US to bolster your portfolio and provide diversification to domestic holdings.
Indrani: For many investors who have very large allocations to the US as we spoke about, when they think about global exposure they first think in terms of very broad ex-United States funds. Do you see that as the first step to taking a global exposure for US investors?
Dan: Of course. Absolutely. I think anything that gets you outside of your home country bias is a good thing. You know, we like to say, look, you've got any number of products that you can use to get access to those sorts of things, so you don't necessarily need to overcomplicate things.
I think the reality is, again, we look at things through the same drivers that you talked about when we talk to clients is, risk, the diversification that's from a beneficial standpoint and then looking across the portfolio, not just necessarily in equities, although that's what we were talking about. But again, looking at the different geopolitical landscape to kind of understand some of the risks that you sort of inherit as you're sitting on the sidelines waiting to get into certain markets.
Obviously, you can look at any number of countries around the world in terms of things that are going on and I think it's just an evergreen idea in terms of looking at specific countries or specific regions, but the thought process of just doing something to get outside the US, there's any number of tools that clients can use to get access.
And I think a lot of times it's actually better to start simply. Building that core piece alongside the US exposure to then at least give you, whether that's market cap weighted or use factors or whatever it is, to give you that ability to then at least have that as your core and then build around it. If you want to be more strategic or more tactical, or you have specific ideologies that you're looking to express.
Indrani: So let's follow that through on how to get into the second level of this global exposure in different ways. Like you and I have talked about it in the past, that there is a lot of dispersion in the market. There are multiple drivers of returns and each of those drivers tend to benefit certain countries, which takes us to the point of having more granular exposure. So what are your thoughts on that granular more geographic granularity, or country wise benefits and which countries would you like to talk about in that perspective?
Dan: You know, I think, again, for a lot of investors, starting with that bigger, broader core piece, looking at how they're allocated, how that fits, is the best way to sort of think about then those extension exposures.
So as you think about getting tactical, India over the last few years, you've seen the emergence of the middle class. You've seen a pretty favourable political backdrop. Again, I think there's a whole host of industries within there, whether that's healthcare or, different services. You have a lot of internet companies there as well. So again, just a lot of opportunity set and that emerging middle class corner becomes a prolonged growth story.
If you look at something like Korea over the last few years you've seen obviously a huge tech boom. You know a lot of the manufacturing, a lot of the innovation that's coming out of there gives a whole host of opportunities. But again, thinking about that in concert within the US and the global landscape gives you the opportunity then to think about a more targeted exposure or a particular expression that you're trying to drive through that allocation.
Japan is one that we see quite a bit. Obviously one of the largest economies in the world. You're finally getting out of that period of disinflation and then now moving into an inflationary period. So you know a lot to like there specifically as well. So no surprise we've seen those grow quite a bit.
But again I think there's a whole host of other countries outside of that where there are specific reasons whether that is something tech related or if it's commodity related, whatever it is. Again, thinking through that holistic version of a portfolio to make sure that you're getting access to pieces that will then help you to diversify away from, whether it's home country bias, or some persistent bias within the portfolio.
Indrani: It's interesting how you pointed out different countries, and each of them had a different set of drivers that are kind of making them part of an attractive opportunity set, maybe. So, another thing I think a lot of investors are struggling with in terms of market conditions last couple of years, and maybe more precisely this year. How narrow the rally has become and also how we are having frequent regime shifts between risk-on and risk-off. So for investors going the ETF route, how would you suggest they approach these two concerns that many have in the market?
Dan: Well, I think the first thing that we do when we work with a lot of our clients, the first thing that we hear from clients and even within our own investment solutions group is, really coming up with an ideology and being solid around investment policy. Understanding why you're investing in something, what's the thesis behind it and what's the target that you're trying to achieve? Whether that is risk, or if it's absolute in terms of performance return, whatever it is. So I think it's having that framework and then being able to deploy that throughout.
You know, I think there's any number of things that have gone on over the last few years but I think something like India, where you actually have a longer trajectory there. Again, thinking about that in terms of your ability to look at that as a multi-year or a prolonged sort of story within the portfolio.
I think certainly given the narrowness and again, depending on how you sort of look at the US and the allocations there, there's things that are coincidental to it and there's things that sort of benefit as a result of it as well. So, like I mentioned earlier in terms of tech, if you're sort of looking to overweight, but there are stories there of companies in Korea, for example, where you'd have the ability to then sort of look at the manufacturing centre as opposed to maybe the end user of it. So understanding the dynamics between those two things and I think really looking at it in terms of which of those is going to win out over time, understanding sort of the rationale for it.
But I think it really does give you then the opportunity to look at other countries that might be maybe a little bit less of a growth story, but are more bolstered by financial services like Europe, where you actually have banks and finance. I guess the financial sector as a whole is 20 some odd percent of the overall continent. So, that's something that might be relative underweight in a portfolio, depending on how you're allocated. If you're more tech-heavy in the US or in some of the emerging economies or some of the developed markets, you know, ballasting that through the portfolio.
So some of it might be a bit more boring, but I think it does give you the opportunity there. Australia as an example from a commodities market, or even Brazil, again, just no shortage of things that can kind of work through the portfolio and we have a lot of these conversations where, do I want to hold the commodity directly? Do I want to look at the mining centres? Do I look at the refining centres? Right. Understanding the owners and the drivers of those sorts of things and then thinking through the exposure from an institutional perspective as to where in that process you'd like to be involved.
Indrani: And actually, you mentioned quite a few emerging market countries and I know Templeton is known for its strength in emerging markets and in general granularity in country exposure. So maybe you would like to talk through about the, what are the strengths of the background that have this very strong focus on EM and country exposures?
Dan: Yes. So early on, I guess, gosh, more than 30 years ago now. So right when Franklin and Templeton merged back in 1992, a big reason for that was Sir John Templeton's belief in ex-US investing and I think, again, as a firm, we're very proud of that heritage and lineage.
And you could point to any number of examples over the 70 plus year history of the firm. But I think for us, it really is about meeting clients and businesses in their local markets. We're in 72 countries across the globe. We have a lot of individual research folks, portfolio managers, any number of people who are on the ground and I think it gives us a unique perspective, not only within the firm, but at a very granular level within the countries as well, because people who live in these places, who are part of the society, who understand the main drivers, not necessarily from a headline, but seeing it themselves on a day-to-day basis.
And I think one of the things that's been really exciting for me in my last ten years at Franklin has been the ability to travel to a lot of those places. Meet a lot of those people, and to really see the speed at which the communication happens now. You know, it's very impressive to get on calls when you have quite literally the entire globe covered in terms of the people who are discussing research, or feedback, or whatever it is.
So and I think for us throughout our history, as we continue to expand, it's just been through that same thoughtful process of diversification of our own brand. So, I think emerging markets as a core tenant and then obviously layering in other investment managers around that. But it's always been something that has driven us, is that the world is a much bigger place than just a US-based or the US for a US-based firm.
Indrani: It's fascinating how you laid out the hands-on experience and understanding as a value add. So, so far I've asked all the questions, but is there anything I missed that you would like to add on? Why global and how best to go global as a wrapping up point?
Dan: Yeah, no I'd say look like I said at the beginning, I think home country bias is comfortable, right? And I think in markets like these you have the opportunity to think through your predispositions around these sorts of things. Again, we have clients from every walk of life, from every size of portfolio. But even the most sophisticated clients that we work with still struggle with these same thought processes.
So, I think one of the things we always impress upon folks is that there's never a bad time to start to move into international markets. Again, you want to be thoughtful. You want to be concerted in terms of your approach and understanding, but it doesn't have to be super-granular. You can just get started in something big and broad.
Look at the biggest index and sort of work backwards from there, if that's what's helpful for you. But I think as the world continues to expand from a knowledge base, from an infrastructure space, where you have so many different moving parts that are all talking to one another on a daily basis, it seems unavoidable for us going forward.
Like I said, the last call it 15 or so years. We don't think the next 10 to 15 years are going to look exactly the same. So taking advantage of those opportunities, diversifying your portfolio by getting outside of the US and really making sure that you have a thesis and an understanding in terms of managing risk as it pertains to biases throughout the portfolio.
Indrani: Thank you. That was so articulately laid out. I thank you for sharing your insights with us. Thank you again.
Dan: Thanks, Indrani.
