Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios

Accounting for Geographic Exposure in Performance and Risk Reporting for Equity Portfolios — March 2015

Section 2: Application to Performance and Risk Reporting

Geographic Exposure to Regions Through Time We analyse the geographic exposure of the constituents of the indices as of June from 2004 until 2013 (10-year period). For the index constituents as of June t, we consider the sales for fiscal year t-1, to avoid a look-ahead bias. First, in Figure 1 below we report the breakdown of global GDP into the four regions and into developed and emerging markets for the period 2003 to 2012 to give an idea of the relative size of these markets and how it has changed over time. We note that the share of the Americas and Europe in world GDP has declined marginally from around 37% to 35% and 34% to 31%, respectively, in the 10-year period. During the same period the share of Asia & Pacific and Africa & Middle East has increased from 24% to 29% and 4% to 6%, respectively. Figure 2 below reports exposure of the S&P 500 index constituents to the four geographic regions. First, if we look only at the FY 2003 exposure, we note that around 80% of sales of S&P 500 companies comes from North America, while 20% comes from the rest of the world, which is a significant indication of a domestic trading pattern. Over the period of 10

companies. For example, the STOXX Europe 600 companies generated only about 55% of their sales in Europe, and more than 40% of their sales in Asia or the Americas. The Asia and US indices are more heavily exposed to their “home” region, but sales in other regions still make up more than 20% of the geographic exposure at the index level. Second, while these indices track companies classified as belonging to developed markets, a significant percentage of sales of index constituents comes from emerging markets, with emerging markets exposure ranging from about 13% to 26.50%. Overall, these results suggest that standard regional indices for developed markets come with considerable “off label” exposures, which in our view should be documented. Additional analysis in the subsections below provides a view of the evolution over time of these exposures. In the appendix, we have reported additional analysis such as the top 50 companies in the index by market capitalisation with their exposure to emerging markets and to non- domestic markets, the top 10 companies in the index with the highest exposure to emerging markets and non-domestic markets and the weight of companies in the index with less than and greater than 50% exposure to non-domestic markets.

Figure 1: Gross Domestic Product (Regional Breakdown)

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