Simple formulas for foreign exposure lose luster.
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By Michael Breen | 09-06-07 | 06:00 AM | Email Article

As my colleague Christopher Davis pointed out in a recent Short Answer, turbulence in domestic stocks has exacerbated debate over how much foreign exposure a portfolio needs. A few decades back, it was simple. Investors dedicated a set percentage of their portfolio to foreign-domiciled firms and received proportionate exposure to foreign economies. Not anymore. Globalization has blurred the lines. A firm's address is no longer an accurate indicator of where it does the bulk of its business.

Michael Breen is an associate director analyst with Morningstar.

A peek at the major benchmarks illustrates this point. As Chris noted, recent research estimates that nearly 45% of the S&P 500 Index's underlying revenue comes from outside the United States. Data is tougher to come by on the main foreign index, MCSI EAFE, but I piled through the footnotes of enough foreign annual reports to see that a similar global trend exists in that index as well. Just as many U.S. companies derive a big share of their revenues from overseas, so do foreign firms earn a big share of their profits from outside their home market.

This trend got us thinking about the impact on investors. So, we dug into the financials and found that labeling firms domestic and foreign based on their domicile isn't always an accurate indicator of their economic reality. The effect on a portfolio can be meaningful, so investors need to dig beneath the surface to understand the true geographic makeup of the firms a fund holds.

It's Not Where You're Located
There are clear similarities in the upper reaches of both benchmarks. The top firm in the S&P 500 is  Exxon Mobil , while  British Petroleum  grabs the same position in EAFE. Both oil companies generate about 30% of their revenue in the U.S. and the remainder around the globe. Nearly all major oil firms have similarly global profiles--regardless of domicile or which index they call home. The story is the same with big drug makers.  GlaxoSmithKline ,  Roche , and  Novartis  are foreign-domiciled members of EAFE.  Johnson & Johnson ,  Pfizer , and  Abbott Labs  are U.S.-based constituents of the S&P 500. All six firms generate close to half their revenues in the U.S. and the remainder around the globe. Similar patterns permeate both benchmarks.

Foreign Exposure at Home
Digging into the S&P 500's holdings revealed a few surprises about the extent of its constituents' foreign operations. I was aware that such U.S.-based firms as  Coca-Cola  and  McDonald's  had a big global presence. But chipmaker  Intel  garnering nearly 80% of its sales abroad was news to me. Ditto for computer maker  Hewlett-Packard : It hauls in two thirds of its revenue abroad. Below is a sample of firms with prominent positions in the S&P 500 that also have with big foreign-revenue streams. 

 U.S. Companies with Overseas Revenue
Company

Industry

Estimated
% Revenue
from Outside U.S.
Intel Corp 
Semiconductors
79.0
Coca-Cola 
Beverage Mfg.
72.3
ExxonMobil Corp 
Oil & Gas
69.0
Schlumberger 
Oil & Gas Services
67.0
McDonald's Corp 
Restaurants
65.5
Hewlett-Packard 
Computer Equipment
65.0
3M Company 
Diversified
61.4
United Technologies 
Diversified
60.0
E.I. du Pont de Nemours 
Chemicals
60.0
Altria Group 
Tobacco
58.0
Procter & Gamble 
Household & Personal Prods
57.0
IBM 
Computer Equipment
57.0
Caterpillar 
Construction Machinery
53.0
Aon Corp. 
Insurance (General)
53.0
FPL Group 
Electric Utilities
52.0
American Intl Group 
Insurance (Property)
49.0
Oracle Corp 
Business Applications
48.0
Praxair 
Chemicals
48.0
Google 
Business/Online Services
47.0
Abbott Laboratories 
Drugs
47.0
American Express 
Finance
47.0
News Corp 
Media Conglomerates
47.0
General Motors Corp 
Auto Makers
47.0
Symantec Corp 
Systems & Security
47.0
Pfizer 
Drugs
46.6
General Electric Comp 
Electric Equipment
46.0
Bristol-Myers Squibb 
Drugs
46.0
Cisco Systems 
Data Networking
45.0
Johnson & Johnson 
Drugs
45.0
Eli Lilly & Company 
Drugs
45.0
eBay, Inc. 
Online Retail
43.0
Yum Brands 
Restaurants
43.0
Apple 
Computer Equipment
40.0
Merck & Co. 
Drugs
39.0
Boeing Co  
Aerospace & Defense
38.0
PepsiCo 
Beverage Mfg.
37.0
Merrill Lynch & Co 
Securities
37.0
Medtronic 
Medical Equipment
36.0
DELL 
Computer Equipment
35.0
Microsoft Corp 
Business Applications
34.0
Kraft Foods 
Food Mfg
33.0

 

 

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