Investors in UK equities have not been disappointed in 2015, with the FTSE 100 – the largest part of the broader market – consistently setting new records.
Performance of index in 2015
Source: FE Analytics
However, figures from the Investment Association show investors have jettisoned UK exposure with the latest numbers showing the IA UK All Companies sector was the least popular part of the market with outflows of £612m while UK Equity Income was knocked off the top spot for the first time in eight months by IA Property.
Perhaps in anticipation of stock market election jitters or the desire to crystallise the decent returns of the past few years, those who are less keen on the UK as investment destination may look to the IA Global sector for greater portfolio diversification.
However, several past FE Trustnet studies may make you hesitate, as these have shown that the majority of global funds have failed to beat their respective benchmarks over the years. This makes the sector a daunting place for both income and growth investors.
Here we look at two funds from the same group, with the same management team, that are designed to work alongside each other and are clear plays on income and growth while retaining a similar method for picking stocks: the £100m Guinness Global Equity Income and £30m Guinness Global Innovators funds.
Ian Mortimer, co-manager of the two funds alongside Matthew Page, says holding the pair together offers investors the ability to scale up or down allocations between income and growth while retaining the managers’ stock picking philosophy.
“They are both global so you don’t have to worry so much about regional allocation. You can just think about valuations: should I be more or less aggressive?” Mortimer said.
In the two funds, Mortimer and Page only invest in companies that consistently earn economic profits in excess of a 10 per cent return on capital invested every year for 10 years. In the case of the growth fund, the universe is further narrowed down by searching for companies that third parties such as analysts and universities consider to be innovative.
“The Guinness Global Equity Income fund is not a high yield fund and we do look for growth as well as income, but it is very much run with a quality as well as a value bias so it has moderate growth and growing income stream Mortimer said.
“We are looking at firms with a consistently high return on capital over the long term, a business cycle at least. We look over a 10-year period at companies that are top quartile for return on capital versus a global peer group.”
Guinness Global Innovators is global multi-cap growth fund that is more geared to companies in an earlier stage of their life-span, where an innovative culture has been identified by independent research. However, the fun is keen to avoid the high valuations often associated with these types of stocks, the manager adds.
“There are many forms of innovation, not just disruptive products from scientific and technological advances. We believe innovation is the intelligent application of ideas and can be found in virtually all industries and at different stages in the company lifecycle,” he explained.
“Companies in more mature industries can make improvements in existing products to boost sales and customer loyalty or they can apply smarter management and improved processes for faster and more efficient product delivery.”
“We believe innovative companies that develop competitive strengths, and maintain good capital discipline, will deliver the key factors behind superior shareholder returns.”
The fund has only been available to UK retail investors since October 2014 and is relatively nimble at £30m. Performance has been broadly in line with the market but it has taken a recent dip, although this is a very short period over which to judge the strategy given its low turnover philosophy.
Performance of fund, sector and index since October 2014
Source: FE Analytics
Both funds have an active share of around 95 per cent, are reasonably concentrated and equally weighted with about 35 stocks in the income fund and 30 in the growth fund.
Neither fund is at the extreme end of their broad sectors and are complimentary because the dividend fund has a much higher quality bias and if the market is up very sharply we tend to not capture all of the upside but also protect on the downside,” Mortimer said.
“On the other hand to get good growth companies we have to give up a bit of quality but if the market is up sharply it tends to do quite well but also fall a bit more when it goes down.”
“While most of our outperformance comes from stock selection, you have two funds that have different portfolios and behave differently. If markets are weak one fund helps you out a bit and if markets are strong the other fund does well. However, it is then up to the individual to decide how much to allocate to each.”
Performance of Guinness Global Equity Income has been good since the fund was launched by the pair at the end of 2010. It has lagged the MSCI World by half a percentage point but has stayed ahead of the sector by 10 percentage points and is in the top quartile for volatility.
Performance of fund, sector and index since December 2010
Source: FE Analytics
It has an OCF of 0.74 per cent and a yield of 3.09 per cent.