Sometimes an industry evolves beyond the research model that covers it. Consider the case of financial exchanges. Sell-side equity research in this area is divided regionally between Asia, Europe, and the United States, with little or no overlap. These regional boundaries, while they make sense for research specialization in other sectors, tend to ignore the global nature of many companies in the financial exchange industry. The recent history of exchange consolidation highlights this issue well.
In many cases, asset managers who bought stocks of companies shown in the 2000–2003 column of the accompanying chart before these companies merged into or were acquired by companies in the 2004–2011 column made enormous profits for their shareholders. But if in 2005 you were an analyst focused solely on European exchanges, you might not have realized that the product mix of Euronext, a pan-European stock exchange, tied in very well with that of the NYSE. Consequently, you may not have anticipated that the NYSE would buy Euronext two years later, generating a significant return for Euronext shareholders. And again, if in March 2012 you had asked a U.S. analyst whether the Chicago Mercantile Exchange (CME) might be interested in buying the London metals exchange, he or she likely would not have been able to offer deep insight. In fact, the CME took part in a bidding war for the London exchange earlier this year, underscoring how regionally defined research on exchanges is poorly equipped to anticipate industry change.
Exchanges in less-developed financial markets in Asia, moreover, are simply less well known and less well covered relative to their U.S. and European counterparts. Of course, there are challenges, from linguistic barriers to regulatory differences and distance, but if you can get past these obstacles, international companies may offer a relatively inefficient and underexplored area of excess-return potential.
Read more in our paper on Putnam's independent research capabilities: Independent equity research: How we do it, and why it matters to investors
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Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
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