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

Executive Summary

In the next table, we provide emerging and developed market exposure of the five developed market indices. All the developed market indices had noticeable exposure to emerging markets in FY- 2003, wherein the S&P 500 and STOXX Europe 600 had the lowest (6.97%) and highest (10.67%) exposure, respectively. Interestingly, the emerging market exposure of all the developed market indices has almost (or more than) doubled in the ten-year sample period. For example, the emerging market exposure of STOXX Europe 600 has increased from 10.67% in FY-2003 to 22.69% in FY-2013, respectively. Also, we find that for popular indices such as the S&P 500, FTSE 100 and STOXX Europe 50, the sum of market capitalisation of the index constituents (or cap-weight of index constituents) weighted by percentage of sales coming from emerging markets was 868 billion USD (or 9.12% in relative terms), 202 billion USD (or 11.39%) and 355 billion USD (12.48%), respectively, in June 2004, which rose to 2,391 billion USD (16.44%), 542 billion USD (24.63%) and 1,070 billion USD (28.11%), respectively, in June 2013 (See Appendix: Tables 7, 25 and 31). These figures also highlight the rise in the emerging market exposure of developed market indices.

regions. For example, the exposure of the S&P 500 to regions other than Americas is 19%. The exposure of the STOXX Europe 50 to non-domestic regions (regions other than Europe) is highest at 44%. Over a period of ten years, the exposure of these indices to non-domestic regions has further increased. For example, the exposure of the S&P 500 to regions other than the Americas has increased by 8% in a period of ten years to 27% in FY-2013. To give another perspective on the importance of growing foreign market exposure of the developed market indices, we find that for indices such as the S&P 500 and STOXX Europe 600, the sum of market capitalisation of the index constituents (or cap-weight of index constituents) weighted by percentage of sales coming from foreign markets was 2,852 billion USD (or 29.96% in relative terms) and 2,469 billion USD (or 41.07%), respectively, in June 2004, which rose to 5,638 billion USD (38.75%) and 4,683 billion USD (53.28%), respectively, in June 2013 (See Appendix: Tables 7 and 13). We thus see a clear trend for foreign geographic exposure to constitute an increasingly important part of popular regional indices, while the importance of companies with a clear focus on the official region of the index in terms of geographic exposure has decreased correspondingly.

Table 2: Emerging/Developed market exposure of Developed market indices- The table below reports the breakdown of sales of constituents of five indices (S&P 500, STOXX Europe 600, FTSE Developed Asia Pacific, FTSE 100 and STOXX Europe 50) into developed and emerging markets. The index constituents are as of June 2004 and June 2013, for which sales data is of fiscal year 2003 and fiscal year 2012. The source of geographic segmentation data is DataStream (Worldscope) supplemented by Bloomberg Emerging Developed Emerging Developed FY-2003 FY-2012 S&P 500 6.97% 93.03% 13.52% 86.48% STOXX Europe 600 10.67% 89.33% 22.69% 77.31% FTSE Developed Asia Pacific 8.29% 91.71% 16.55% 83.45% FTSE 100 9.55% 90.45% 22.08% 77.92% STOXX Europe 50 10.39% 89.61% 26.50% 73.50%

8

An EDHEC-Risk Institute Publication