M*: Investing Close To Home Is Overrated

Ted

FYI: Most U.S. investors have a bias toward U.S. stocks. If the relative value of assets invested in U.S.-listed mutual funds and exchange-traded funds is any indication, the average U.S. investor allocated about 24% to foreign-stock funds and 76% to U.S.-stock funds at the end of June 2019 (this excludes sector and global funds). In contrast, U.S. stocks represented about 45% of the FTSE Global All Cap Index. It isn’t necessary to eliminate this bias toward U.S. stocks to reap the diversification benefits that foreign stocks offer. That said, foreign stocks should represent a considerable portion of most investors’ portfolios.
Regards,
Ted
https://www.morningstar.com/articles/949609/investing-close-to-home-is-overrated

Mark

Tell that to MPGFX investors.

msf

Surely you're not suggesting that 3M does most of its mining and manufacturing in Minnesota, or that US Bank does most of its lending to midwest businesses. I might grant you midwesterners consume a lot of processed meats (Hormel). But enough of this Spam

Mairs and Power says that it invests in (local) companies it knows about. That's an argument for investing in global funds where the managers live abroad (close to the companies they invest in), not for investing in companies that do business close to home.

Counter example to regional investing: FKCGX, formerly Franklin California Growth Fund. One would think that California would be a broad enough market that a fund could easily limit its investments to that state. (Franklin is based in San Mateo, Calif nearly midway between San Francisco and Silicon Valley, and a stone's throw from Oracle.)

But it first dropped its 80% California requirement to 50%:

It has been a policy of the Franklin California Growth Fund, under normal market conditions, to invest at least 80% of its net assets in equity securities of California companies. Effective September 1, 2002, Franklin California Growth Fund will change its name to "Franklin Flex Cap Growth Fund" and will eliminate the 80% investment policy. ... [replacement strategy] The Fund normally invests a majority of its assets in California companies

Apparently that wasn't "flex"ible enough.

Effective October 1, 2004, the section "Goal and Strategies" ... is replaced with the following: ...

Under normal market conditions, the Fund invests primarily in equity securities of companies that the manager believes have the potential for capital appreciation. The Fund has the flexibility to invest in companies located, headquartered, or operating inside and outside the United States, across the entire market capitalization spectrum from small, emerging growth companies to well-established, large-cap companies.

The successor fund was merged into FGRAX in August 2016.

1999 NYTImes feature on FKCGX. Like Mairs and Power, emphasizing knowledge of companies near where the managers are:

Call it the home-team advantage.

"We're able to keep close tabs on our investments," said Conrad B. Herrmann, lead manager of the $1.58 billion Franklin California Growth fund, which focuses on California companies. "We read local newspapers in California and socialize and interact with people who might be employed in the companies in our universe."

Mark

Nothing of the kind but I think that you make much ado about little. On the funds homepage they say they seek companies with headquarters in the midwest. However since you singled out Minnesota they have this to say about the state:

"Minnesota: An Opportunity Rich Landscape for Investors
Successful investing requires discipline, patience and a singular focus on what matters. Our success over more than eight decades has been built
on delivering superior long-term investment performance for our clients. While solid investment opportunities can be found in many places
beyond the borders of Minnesota and the Upper Midwest, our firm’s second president, George Mairs III, recognized that he was surrounded by an abundance of opportunities close at hand. Taking advantage of that fortunate circumstance, investing in what we know, has enabled Mairs & Power and our clients to grow and prosper. We believe that by looking for investment opportunities close at hand, we will continue the Mairs & Power legacy of investment success far into the future."

White Paper

msf

The point of the article was that "a heavy bias toward U.S. stocks can hurt diversification and is often based on misconceptions." MPGFX does not refute that.

The article stated that "While most large U.S. stocks represent multinational firms, U.S. stocks tend to have significantly greater exposure to the U.S. market than their foreign-listed counterparts." That is, funds that focus on a particular region (here, the US), don't get ample exposure to markets outside their region - so one should consider adding that exposure.

MPGFX focuses on one region (part of the US), yet it does indeed get exposure to markets outside of its region. (Or as I so flippantly expressed it, Minnesota Mining and Manufacturing doesn't do most of its mining and manufacturing in Minnesota.) So sure, if you invest in MPGFX you likely don't need another domestic fund. Still it's no better than other domestic funds at providing exposure to foreign markets.

The proposition that MPGFX stands for is not so much that you can get substantial exposure outside of where the fund concentrates. Rather, as I stated in my original post, it is that managers can do well investing in (local) companies that they know about. Your quote says the same thing: that the fund mangers are "Taking advantage of that fortunate circumstance [proximity to companies], investing in what [they] know."

Which just means that if you invest in a Japan fund, you might want to check that your fund manager is based there, and not in St. Paul.