Invest in growth, not geography, American Funds says

A financial adviser building an equity portfolio is very likely doing so around global benchmark indexes such as the S&P 500 or the MSCI EAFE, but according to American Funds, there is a better way. "Advisers need to think less about geography and more about the real objective," said David Polak, vice president of Capital Group Institutional Investment Services, a subsidiary of American Funds. "Where a company is domiciled used to be a good indicator of its economic exposure," he said. "Now, companies do business all over the world. A different lens is required," Mr. Polak said. In the S&P 500, for example, about 40% of the index's revenue comes from outside the United States, so investors who think that they are buying only American companies are actually getting a global portfolio, he said. It isn't just a U.S. phenomenon. Take British luxury company Burberry Group PLC, for example. Even though it is based in the United Kingdom, it gets 75% of its revenue from outside Europe. "If you're buying a European [exchange-traded fund], you're probably not getting what you think you are," Mr. Polak said. So instead of building portfolios around indexes that group companies together based on where they are located, advisers should start by targeting a goal, such as capital appreciation, he said. Then look to areas of the world where there is growth, such as the emerging markets, and find companies that have growing revenue there, Mr. Polak said. "All portfolios are already global," he said. "But why have a fund that groups companies together just because they're located in the same place?"