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By Janet Yang, CFA | 06-19-2014 02:00 PM

Follow the Money to Understand Your Stocks' Real Exposures

Knowing the sources of a company's revenue, not just its country of domicile, is important for investors to get the actual exposures they want, says American Funds portfolio manager Rob Lovelace.

Janet Yang: I'm Janet Yang with Morningstar. Today I am at the Morningstar Investment Conference with Rob Lovelace from Capital Group, The American Funds.

Rob, thank you for joining us today.

Rob Lovelace: Real pleasure. Thank you for having me.

Yang: You and your team have been doing some pretty interesting research looking at your funds and your portfolios and their country exposure, not necessarily by their country of domicile, but from where their revenues are coming from. Can you tell us a little bit more about that research?

Lovelace: Absolutely. We're referring to it as the new geography of investing. It really is recognizing the fact that, back in the '60s and '70s, where a company was based, where it was listed, was a really good proxy for where it did business. We all know that the world is globalized, and I think everyone's aware that most companies do some business abroad, and I think in the '90s and 2000s, it still was a minority of the total revenue of the company that came from other countries.

But really in the last 10 years, things have changed to the point where we probably need to start paying attention to it now. And that's the work that we have been doing, and that's what the new geography is about, which is finding a new proxy for thinking about where a company does business. You can think of lots of examples--the auto companies are probably the easiest ones--of companies that are based in Japan, but do a majority of their business in the United States, or that are based in the U.S. and are one of the biggest auto producers in China, or based in Europe and do business everywhere, except maybe not so much in their home country.

So, what's the best way when you're looking at your portfolio to think about the actual exposure of that company? Where a company is listed still matters. That has an impact, obviously, on the currency in which the stock is denominated, maybe their liabilities, and certainly investors in that country will look at it that way and what index they are in. But you can look at the revenues now--companies are reporting it in a way that actually gives you enough information.

So we think revenue is the best new proxy for where a company does business, and we're working on developing standards so that can be part of normal reporting.

Yang: Can you give us an example, maybe one that an investor would find surprising, in terms of where it's domiciled versus where its revenues are actually coming from?

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