Global equities lost more than 30 per cent in the 9 months following the 2008 financial crisis but have since bounced back by more than 40 per cent from the their pre-crisis levels.
Performance of index since 1 June 2008
Source: FE Analytics
In the IMA Global sector – which stipulates a fund must invest 80 per cent in developed world equities - only three funds have failed to stay ahead of cash over the past five years.
Two made a loss and one and one made slightly less than the rate of inflation as measured by the Consumer Price Index.
Investors have been increasingly rewarded for taking on risk, measured by levels of annualised volatility as time has passed since the crisis.
In the graph below, which measures the relationship between risk and return over the past six years, the funds in the IMA Global sector have outperformed have taken on lower levels of risk.
Risk/Return of Targeted Global funds over 6yrs
Source: FE Analytics
However, as markets have recovered the reverse has happened with those funds that have outperformed heavily correlated towards high rates of risk in the more recent period.
This switch is shown acutely in the graph below which measures the relationship of risk and return over two years, suggesting outperformance has depended on making riskier plays as markets continued to rise.
Risk/Return of Targeted Global funds over 2yrs
Source: FE Analytics
A common theme of the funds that have outperformed have been overweight positions in US equities.
This is unsurprising given the high growth of its stock markets since this period.
The S&P 500 has out-paced the FTSE All Share and the MSCI Europe since the financial crisis
Performance of indices since 1 May 2008
Source: FE Analytics
A good example of this is the £200m Templeton Growth fund which has more than a third of the portfolio in US equities
Performance of fund, sector and benchmark over 3yrs
Source: FE Analytics
Warner says whilst he expects the US to continue rising upwards in the medium term he foresees a slow 12 months with about a 10 per cent chance of a market correction.
“I’m neutral on the US and I do think the economy will grow but there is likely to be setbacks before it moves further forward.”
“The country’s Q1 GDP of 0.1 per cent is said to be all down to the weather, but I’m not convinced that was the case and it may be due a slowdown in the short term, which may panic the market in the short term.”
“Also we are still waiting for the earnings to come through that we paid for last year.”
“Fundamentally, long term GDP will recover. In the US they have sorted out a lot of the problems in their banking system, whereas Europe is yet to do that.”
Warner says investors should be generally more cautious over the medium term with exposure to global equities in general but look for some diversified higher-risk investments in areas such as technology and emerging markets for a long-term play.
“Playing a riskier, high-growth strategy with fund manager that has the ability to look for exciting new ideas may be fruitful in the long-term,” he said.
He recommends the £143m Baillie Gifford Discovery fund run by FE Alpha Manager Douglas Brodie which recently changed its mandate to invest heavily in tech after being previously focused towards European smaller companies.
Warner says the performance has suffered recently due to the fund changing its mandate but looks at new technology which is quite exciting on a longer term basis.
The fund has beaten both its sector and benchmark over three years and has returned 38.66 per cent.
Performance of fund, sector and benchmark over 3yrs
Source: FE Analytics
Warner says the greatest headwind is the tapering of the Fed’s monthly stimulus program and the market’s reaction to it.
“Ever since QE started trying to understand what markets are doing has got harder and harder and trying to outguess it increasingly difficult.”
“The relationship between different geographical equities and fixed income has gone out the window.”