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Rekenthaler Report

You're More Internationally Diversified Than You (Probably) Realize

Morningstar's research into the sources of corporate revenues.


The United States
You have likely heard the claim that equity portfolios can't help but to be global. Multinationals account for most stock market assets, and they sell their wares everywhere. Where a blue-chip company is headquartered does not indicate its revenue sources.

In a new report, Morningstar puts that belief to the test. I can't link to the article, because it's tucked away in Morningstar Direct's institutional software, but I can provide its highlights. (The underlying data will eventually appear on 

According to Morningstar's calculations, 62% of revenues for S&P 500 companies come from the United States. As S&P 500 firms account for 80% of the Wilshire 5000's capitalization, that index scores similarly. Consequently, shareholders of major U.S. stock market index funds have about 40% foreign exposure, as measured by corporate revenues.

Other Countries
Unsurprisingly, given that the U.S. is easily the largest consumer market, this figure is above other countries'. Japan and Australia are close, with 59% of the Nikkei 400's revenues arriving from inside Japan, and 58% of the S&P/ASX 200's revenues being from Oz. Island nations! However, the United Kingdom's amount is far lower, with domestic revenues of 22%.

Which is the highest figure calculated by Morningstar in Europe. As the U.K. is realizing, no European country is anything resembling stand-alone. Almost all the continent's major companies operate mostly across national borders. Just under 20% of revenues for companies in Germany's DAX Index are local; for France's stock market benchmark, the figure is 17%.

Small-Company Effect
Everywhere, the home-nation percentage rises as the companies shrink. In the U.S., 81% of the revenues for the long-standing small-company stock index, the Russell 2000, are domestic. In the U.K.'s small-company indexes, the figures are roughly 50%, and in Continental Europe they are 30% to 40%.

With some effort, U.S. investors could largely avoid exposure to foreign revenues. In practice, however, the customary portfolio of 1) a core of U.S. blue-chip stocks surrounded by a smattering of 2) U.S. small-company equities and 3) overseas issues leads to an overall revenue mix of roughly 50/50. In other words, most American stock-fund shareholders are halfway dependent on the kindness of strangers.

The domestic-revenue percentage declines to about 40% for the typical Australian mutual fund owner (not so much because the revenue streams for Australian companies are more diverse, but rather because Australian investors own more foreign-headquartered stocks than do Americans) and 20% for European shareholders. The latter can't really avoid having an international perspective.

Varying By Industry
Industry exposures vary widely. Companies in sectors that have the most-diversified revenue streams--ranging in the U.S. up to 85% for semiconductors--make things: chips, phones, soap, plastics. Such items can readily be shipped. In addition, most can be built elsewhere, cost effectively.  Coca-Cola (KO), for example, owns 57 manufacturing plants in India. That the firm is based in Atlanta is immaterial to its business.

In contrast, those with the highest local percentages tend to purvey services, which neither fit into packages, nor into cargo holds. Moving electricity is difficult, and while sending natural gas abroad can be accomplished, doing so while retaining control of the product generally cannot. Consequently, 97% of U.S. utilities' business is generated within the 50 states. Telephone services, banking, and transportation also tend to be local.

Assessing Performance
The question arises: How do the sources of a revenue stream affect a stock's returns? For example, if a company based in the U.S. generates 50% of its sales at home and the other 50% in Europe, will its stock move in tandem with the stock of a European company that shares its industry and revenue mix? Or, will the location of their domiciles send those two stocks scurrying in different directions?

You got me. Morningstar has yet to study that subject, and because the global data are only now becoming available, neither have many academic researchers. (No doubt some have, but my admittedly brief Internet search yielded no results. If you know of such a study, please let drop me a line.) This field has not been well-explored.

When the papers are released, I suspect that their findings will be, "It depends."

For one, the studies will be difficult to conduct. No two companies have identical revenue streams, and no matter how closely their businesses resemble one another's, there are still large discrepancies, which must somehow be considered in the calculations. Controlling for all relevant effects will be a chore indeed--and will make the resulting estimates loose rather than precise.

The Middle Ground?
For another, the truth likely falls somewhere in the middle. Researchers have documented that even in the simple, obvious case wherein the same company's equity is dual-listed and available for sale on two countries' stock exchanges, its performance reacts to its whereabouts. The two versions of the shares do not move in lock step, although both logic and conventional financial theory suggest that they should.

Also relevant is the performance of real estate investment trusts, equities that hold real estate. One might think that investors would "look through" REITs' structures, but that is only partially true. REITs trade as hybrids. To some extent, they offer real estate exposure, and to some extent they are small-company U.S. stocks. A bit of this, a bit of that.

Which, eventually, will be the verdict for most of the world's blue chips. They sway to their home country's winds. However, as their businesses are thoroughly global (aside from certain services companies), they cannot help but to be affected by what happens elsewhere. The giant firms that dominate the stock indexes offer substantial international diversification, whether the investor desires that attribute or not.

The Last Word
Famously, Jack Bogle maintained that U.S. investors did not need to hold foreign stocks. He offered several arguments besides what this column has given, including the claim that dollar-based liabilities should be supported by dollar-based assets. But one of his key contentions was that international diversification comes out in the wash, because big business is global. Morningstar's recent release supports that point.

Foreign Customs
Earlier this month, my wife and I were in an airport, in a country that shall not be named (so as to protect the guilty). She ordered a hot tea. The attendant at the kiosk handed her a cup. My wife took a sip. "That's not tea, that's coffee!" The attendant apologized, made a tea, and gave it to her. My wife stepped aside.

The next customer approached the counter. "Coffee, please." The attendant handed him … my wife's cup.

Morningstar Direct clients can find more information on Morningstar’s revenue by region data in this white paper available here.


John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.