Investors may be too worldly today

That’s because every fund is a global fund

People of a certain age — OK, old people — will recall taking geography in high school. These same people can now tell you the capitals and main exports of dozens of countries that no longer exist, and will have some difficulty naming any country whose name ends in - stan.

The world has changed a great deal since the days when we first learned to scrape our names on stone tablets in a one- room schoolcave. The world has also changed since mutual fund analysts began classifying funds by the countries in which they invested. Many companies do more business outside the country where they’re based — and that means you could have far more exposure to currency risk and even political risk than you thought.

Most broad- based international funds measure themselves against the MSCI Europe, Australasia and Far East index, which measures the performance of large- company stocks headquartered in developed countries outside the United States and Canada.

Normally, few funds can beat an index over the long term, as can be seen by the generally miserable performance of the average large- company stock fund against the Standard and Poor’s 500- stock index. But your

average international fund has not only beaten EAFA, but sent it mocking notes and dead flowers in the hospital. The past 25 years, Lipper’s International Fund Index has gained 464%, vs. 280% for EAFE.

Much of the reason has been Japan, whose stock market still remains 49% below where it was a quarter- century ago.

But a recent study by the American Funds argues that measuring stock performance by geography alone might be misleading. Consider the S& P 500. Many of the large companies in the S& P 500 have an enormous global reach, and companies in the S& P 500 get 46.6% of their revenues from outside the U. S. says Howard Silverblatt, senior index analyst at S& P.

Revenue from foreign companies tends to be far less centered on their home country. Burberry, for example, is noted for overpriced raincoats with a distinctive plaid lining. It gets just 25% of its revenue from the U. K., and 33% from China and other emerging markets.

Thinking of investing in the U. S. housing recovery? You’d want to own shares of Techtronic, a Hong Kong company that makes Ryobi power tools and gets 73% of its revenue from the United States.

By the American Funds’ reckoning, U. S. companies make up 49% of MSCI’s All Country index, but account for just 28% of the world’s corporate revenues. In contrast, 21% comes from developed Europe, and 34% comes from emerging markets.

The American Funds think that revenue information is important enough to start including it in their investor literature, although they haven’t done so yet. Russel Kinnel, Morningstar’s head of mutual fund research, thinks it’s important, too. “In the short run, the company’s domicile does matter a fair amount, but on another level, it’s silly,” Kinnel says. “If you think Caterpillar is a play on the U. S. economy, well, it hasn’t been since 1970. It rises and falls with China.”

Raman Subramanian, executive director in research for MSCI, warns that you can’t simply use revenues instead of geographic location. “Today you have multiple ways of looking at the investing universe, rather than one,” he says. But overlooking the country where a company is domiciled is a mistake: Politics, central banks and other considerations can matter a great deal.

Certainly, the American Funds’ study should make you rethink the old rule of thumb that you should have 10% to 25% of your portfolio invested in international funds. “The reason you get the 10% to 25% recommendation is because people fear foreign stocks and perceive them as risky,” Kinnel says. He noted that a recent poll found that virtually everybody in every country viewed foreign stocks as riskier than those traded in their own country.

The 10% to 25% rule is even sillier if you consider that the companies in an S& P 500 fund gets nearly half their income from abroad. Using that logic, you could use the Vanguard 500 Index fund ( VFINX) or its extended- market cousin, Vanguard Total Stock ( VTSMX), as your main stock holding and avoid international funds altogether.

You could also go the other way, and use a global fund as your main holding. By doing so, you’d get exposure to stocks all around the world without worrying what percentage to have in the U. S. and what percentage abroad. A few suggestions:

uFor index fund investors, it’s hard to argue with Vanguard Total World Stock Index ( VTWSX), which has low ongoing expenses and gives you a broad basket of global giants. It has gained an average 14.73% a year the past five years.

uFor fans of actively managed funds, Wasatch World Innovators ( WAGTX) has gained an average 24.55% a year the past five years, beating the average fund handily.

uMore aggressive investors might consider iShares Global Consumer Discretionary ETF ( RXI), which is a play on increased demand from emerging markets for the good things in life. It’s up 20.07% a year the past five years.

Clearly, the world has changed since we were playing with dinosaur bones in the backyard. But looking at your fund’s portfolio by their companies’ revenue sources makes good sense. With luck, perhaps sources of revenue will be a new item in your fund’s quarterly reports.