A global equity fund is an investment vehicle that buys stock in companies from around the world. An investor buys into the fund instead of purchasing stock from an individual company. In this way, his investment is spread across a number of companies, decreasing the impact of market volatility on any single company and stabilizing potential returns at a composite average across companies.
Equity is the ownership interest in a company, represented by shares of stock held by stockholders. Public companies register their stock for purchase on the stock markets of the country where the company is registered. An equity fund aggregates companies into an investment group by characteristics that can typically include the size of the companies, the amount of risk associated with investing in the companies, or where the companies are located. The defining characteristic of a global equity fund is its international investment scope.
Historically, U.S. companies dominated the international equity market. With the largest economy in the world, the stocks from companies located in the U.S. were considered the safest investments and comprised the bulk of the market for trade. Investing in companies from many other countries was considered a highly risky endeavor. Globalization has changed that equation, and new economic interdependencies have benefited burgeoning countries, providing increased access to new markets and decreasing the importance of the U.S. market.
Investment in foreign companies has become an important way to diversify an investment portfolio and achieve better returns. A global equity fund spreads the investment risk across the economies of diverse countries, making it easier for the entire portfolio to weather an economic downtown in any one country. Many investment firms now offer global funds that have outperformed domestic funds over time. Investors have the option of buying into an actively managed international mutual fund or a passive index fund that includes all companies on a particular list, such as the top 500 companies by market capitalization in the world.
Although a global equity fund can achieve returns that outpace a fund that invests solely in domestic companies, it is not an investment vehicle that is suitable for the most conservative investors. Risk is generally spread across economies, but the level of overall risk is still much higher than an investment portfolio grounded in the mature and stable economic environment of a county like the U.K. or the U.S. Emerging economies are volatile and can be destabilized by politics, natural disasters, social unrest, and a host of other factors that can impact a country’s burgeoning business environment.