What stops us from investing globally?

A globally diversified portfolio provides investors with “the broadest possible opportunity set,” said Gerald Smith, chief investment officer at Baillie Gifford, speaking recently at the Pension & Benefits Summit in Toronto.

Baillie Gifford—an Edinburgh-based investment management firm that has been investing in global equities since 1909—has learned a few lessons over the past century.

First, markets are not efficient, Smith said, and some academic studies have shown that genuinely active managers do have a tendency to outperform.

Second, risk is not volatility. “They really are very different things,” said Smith. “Volatility is sheer prices going up and down, and risk is losing your money.”

Third, investing is not physics. “There is a great desire to be able to put everything into an equation, and finding something that you can plug in as a number gives you this feeling you’ve controlled everything,” said Smith.

Along with this notion is the idea of “maximizing the probability of big winners. This should be one of your guiding principles for selecting stocks from around the world.” But why is this difficult to do? he asked.

Smith offered several reasons:

• The investment industry is generally short-term focused. “We should be focused on the long term…but we’re all trading around like mad.
• There’s a misunderstanding of risk.
• Investors have a desire for smoothed returns.
• Investors are fixated on benchmarks.
• Investors are myopic. “People become experts on very small areas but then miss the big picture.”
• Investors don’t recognize the growth potential. Investors tend to think that if a company is doing poorly for the last five years, it will do poorly for the next five, and if it’s been doing well, it will continue to do well, he said. “We have a tendency to extrapolate the recent past rather than actually getting under the real skin of the investment.”

“All these factors,” said Smith, “tend to push people away from the things that actually make the success of global equity investing over the long run.”

For investors looking for a global fund manager, Smith said to look at active management. “Past performance is not a good guide to future performance,” he said. “People who are good active managers will have pre-written underperformance, but if they’re genuinely active, then that’s the thing I would be looking for.”