Why you’d be better off constructing your own global portfolio
Many investors looking to diversify away from the UK opt for a fund in the IMA Global sector, but research shows a similarly weighted basket of region-specific funds would have served them better.
By Jenna Voigt, Features Editor, FE Trustnet
Monday October 29, 2012
Since the market collapse of 2008, the debate around
diversifying asset allocation in order to reduce portfolio risk has become more heated.
Global portfolios have offered investors the ability to diversify holdings within one fund, but according to
FE Trustnet research, investors would have been better off investing in regional funds in terms of total returns.
A portfolio of IMA regional sectors split across the current asset class weightings of IMA Global has come out on top over one, three, five and 10 years, albeit with slightly more volatility. Over 10 years, the regional portfolio has returned 98.75 per cent, compared with 91.65 per cent from the average Global fund.
Performance of portfolio vs IMA Global sector's funds over 5-yrs
Source: FE Analytics
As a result of the regional weighting in the Global sector, IMA North America has a 45 per cent weighting in the portfolio, IMA UK All Companies has 16 per cent, IMA Europe ex Japan has 14 per cent, IMA Japan has 7 per cent, IMA Asia Pacific ex Japan has 6 per cent, the average commodities fund has 5 per cent, IMA Global Emerging Markets has 4 per cent and IMA Money Markets has 3 per cent.
The margin of outperformance is even greater when looking at the top-rated regional and Global funds.
Using the weightings above, a portfolio of five crown-rated regional funds would have returned 34.65 per cent over a five-year period, compared with 28.85 per cent from the average five crown-rated Global fund.
Performance of portfolios over 5-yrs
Source: FE Analytics
The regional portfolio also comes out on top over one- and three-year periods.
It includes the $2bn
Aberdeen Global Emerging Markets Smaller Companies, £1.1bn
BlackRock European Dynamic and £58.2m
MFM Slater Growth funds.
The last two are headed up by FE Alpha Managers – Alister Hibbert and Mark Slater – while the Aberdeen fund is led by the firm’s sought-after global emerging markets team.
While the wide spread of regional allocations can help to dampen volatility, head of FE Research Rob Gleeson
(pictured) says a wider area of coverage is a disadvantage for global funds.
"A global fund, even with a large team, will have to be spread extremely thinly to cover all markets," he explained.
"Additionally, most will also be responsible for looking at broader macro themes as well to decide allocation between regions."
"My opinion is that it is better to separate these two functions and pick regional specialists who are able to cover their markets in depth. You’re then responsible for your own asset allocation."
"Multiple regional funds allow investors to diversify across investment strategies as well, rather than applying a single style across all regions," he added.
However, while Gleeson thinks sophisticated investors would be better off constructing their own portfolios, he says those who prefer to leave overarching asset allocation decisions to the professionals are better suited to a Global fund.
"I think most Global funds could be considered a jack of all trades rather than outstanding across the board," he added.
Gleeson himself uses regional funds rather than an all-in-one global product.
In his latest weekly blog, he highlighted the funds he has recently decided to drop from his pension, including
Fidelity American Special Situations and
Fidelity South East Asia.