Certain investors may want to take the low-cost option and use trackers to gain access to global and regional markets, but FE data shows that there are certain managers that have justified their often higher ongoing charges by consistently beating the index.
With this in mind, we look at four funds across the various non-UK equity sectors that have not only considerably outperformed over the longer-term, but have done so with a very low beta and high tracking error relative to their benchmark.
Morgan Stanley Global Brands
A recent FE Trustnet study showed that a high proportion of funds in the IMA Global sector have failed to beat the MSCI World index over recent years. However, one fund that has bucked the trend by generating a high level of alpha is Morgan Stanley Global Brands.
The £584m fund, which is headed-up by an eight-strong investment management team including FE Alpha Manager Peter Wright, was launched in February 2003.
It has been a top-quartile performer since then with returns of 257.68 per cent, beating its benchmark – the MSCI World index – by close to 70 percentage points.
Performance of fund vs sector and index since Feb 2003
Source: FE Analytics
The fund has the eighth-lowest beta in the sector over this time and has a tracking error of more than 10 per cent. It is a similar story over seven years, as the fund is a top decile performer and has comfortably beaten the index, with bottom decile beta and tracking error scores.
Morgan Stanley Global Brands is a concentrated portfolio of top quality companies, with market-leaders such as Nestle, Unilever and Microsoft featuring in its top 10.
The fund's defensive nature means it has tended to lag behind its peers in strongly rising markets such as in 2013 and 2009. Its outperformance has been generated in times of uncertainty as it lost just 4 per cent in the crash year of 2008 and made 8 per cent in the falling market of 2011.
Its ongoing charges figure (OCF) is 1.00 per cent.
Veritas Global Equity Income
The £2.7bn Ireland-domiciled Veritas Global Equity Income fund, which is run by the FE Alpha Manager duo of Charles Richardson and Andy Headley, is the pick of the bunch from the IMA Global Equity Income sector.
Our data shows it is the best performer in the sector over seven years, with returns of 96.49 per cent, beating its MSCI World benchmark by more than 30 percentage points.
It has the lowest amount of beta in the sector over this time and the second highest tracking error.
Performance of fund vs sector and index over 7yrs
Source: FE Analytics
Veritas Global Equity Income has also been consistent, beating its benchmark in all but two calendar years since its launch in February 2005. It is currently up against the index in 2014 and is top decile in the sector.
The fund is very underweight US equities relative to its benchmark, with the managers favouring European, Asian and UK stocks. Its biggest sector bets are energy, industrials and healthcare.
Although Richardson and Headley currently hold 8.3 per cent in un-invested cash, their portfolio still yields 4.3 per cent.
Veritas Global Equity Income has a strong institutional following and is the most popular global equity income fund with funds of fund managers, but it is open to retail investors as well. Its total expense ratio (TER) is 1.16 per cent.
Threadneedle European Select
The outlook for European equities, especially over the short-term, looks promising as the ECB has promised a further interest rate cut and added stimulus measures.
For investors looking for a core active manager for their continental exposure, the five crown-rated Threadneedle European Select fund has delivered market beating returns over the longer term while largely ignoring its benchmark.
The £2.1bn fund was launched in 1986, but FE Alpha Manager David Dudding took charge in July 2008.
Threadneedle European Select has been the fourth best performing portfolio in the IMA Europe ex UK sector since Dudding took charge, with returns of 90.49 per cent.
Its FTSE World Europe ex UK benchmark has returned 48.05 per cent over this time.
Performance of fund vs sector and index since July 2008
Source: FE Analytics
The fund has the second lowest beta – 0.66 – over this time and the ninth highest tracking error relative to its benchmark, at 12.69 per cent.
The fund is also top decile for its alpha generation and information ratio.
Dudding has beaten the index in each calendar year since he took over, except in 2013 when the fund failed to keep pace with the strongly rising market and underperformed by 3 percentage points.
It is a predominantly large cap portfolio. Dudding’s largest overweight positions are in consumer goods and basic materials.
Its OCF is 1.06 per cent and it has a yield of 2.2 per cent.
Another truly active fund in the IMA Europe ex UK sector that is worthy of mention is FE Alpha Manager Feras Al-Chalabi’s CF Odey Continental European fund.
According to FE Analytics, it has been top quartile over seven years and more than doubled the returns of its benchmark. It also has the second lowest beta and second highest tracking error in the sector over this time.
Neptune Japan Opportunities
Japan has been one of the most volatile equity markets over recent years. After years of crippling deflation and a strong currency, it rallied in 2013 on the back of Prime Minister Abe’s reforms, only to sell off significantly at the start of this year.However, it has once again bounced back and is up 6 per cent over the last three months.
A lot of investors steer clear of Japan because they have had their fingers burnt in the past, but if they want an active manager – and are willing to stomach the volatility – Chris Taylor’s £390m Neptune Japan Opportunities fund could be an option.
Taylor, who is an FE Alpha Manager, has run the fund since May 2005.
His fund is the best performer in the IMA Japan sector over this time with returns of 175.8 per cent and has nearly tripled the returns of its TOPIX benchmark.
Performance of fund vs sector and index since May 2005
Source: FE Analytics
It has the lowest beta and the second highest tracking error in the sector relative to its benchmark over this time.
It has made the most out of strongly rising markets, returning 50 per cent in the 2013 rally, but has offered little protection when they have fallen, as shown by its double-digit losses in 2011.
Taylor currently has a large overweight position in “large, well-financed, industry dominant Japanese multinationals”, such as exporters in the industrials and basic materials sectors, as he wants to keep a portfolio that will benefit from a weakening Yen.
Neptune Japan Opportunities has an OCF of 0.77 per cent.
