Are U.S. Companies Really American? Is EAFE Past Its Prime?

In an investment world in which due diligence managers are trained to chastise style-drifting portfolio managers, Ketterer argues that pledging allegiance to the EAFE Index is a form of misplaced loyalty. "What do clients want? Do they want to have a very fragmented set of indices where they think they can make these geographic distinctions or can they let us do it? Who is best suited to determine the geographic exposures? We're the ones in the trenches," she says.

And seen from the battlefield, the country of listing – as the Coca-Cola Enterprises example attests – is neither a reliable way to diversify client portfolios nor manage risk. Ketterer believes Causeway is the first investment management firm to map the revenues of companies in clients' portfolios. She cited research that fast-growing emerging markets account for more than 10% of revenues from developed market stocks; but that exposure can reach as high as 40%-plus in Austrian stocks and close to 20% in the U.K., or be as miniscule as less than a percentage point in New Zealand and Ireland and a measly 6% in the United States.

Causeway does not have hard and fast rules targeting its sources of revenue, but "the knowledge is crucial," says Ketterer. "Otherwise, you get blindsided." While some might simplistically look at Causeway's revenue map for opportunities to maximize ownership of, say, rapid growth in India through the safety of an established British company, Ketterer says the firm's mapping strategy plays a crucial role in limiting clients' risk through overconcentration in any one area. The revenue impact of Japan's recent tsunami and nuclear crisis is an example of this danger. "Typically, the more geographic discretion we have, the better risk-adjusted performance we generate," she says.

Professional investors would do well to think more critically about the formalistic yet artificial restrictions they impose on their investing. Managers of domestic stock portfolios are investing "wildly" overseas, she says; and unless they're sticking to local utilities companies, the fungible nature of cross-border capital flows would make for a quite colorful diagram, with "arrows going back and forth and sideways."

Coca-Cola's teaching "the world to sing in perfect harmony," as the 1970s-era commercial had it, presaged the emergence of globalization. Celebrating with Coke at the fall of the Berlin Wall may have marked its triumph. Now Causeway's unique form of borderless investing through revenue mapping may be the first breach in the artificial barriers with which investment managers wall off their portfolios. Predicts Ketterer: "The EAFE Index is going the way of the buggy whip."