Though it sounds counterintuitive, the global sectors have proven to be one of the worst hunting grounds for active managers despite the fact they literally have the whole world to choose from for opportunities.
Data from FE Analytics shows that just 30 per cent of genuine global active funds in the IA Global and IA Global Equity Income sectors have managed to outperform the MSCI AC World over the last 10 years – and it’s a similar story over one, three and five years.
Naturally, there are always going to be funds which underperform. However, more recently some of the once top-performing and highest rated funds have fallen onto the list of portfolios which are failing to beat their benchmarks.
Therefore, in the next article in the series, we look at three global funds which were once the stars of their sectors but have since started to struggle and ask the experts whether they expect this trend to continue or if a rebound is on the cards.
Stuart Rhodes’ M&G Global Dividend fund is arguably the best known global offering available to retail investors and its assets have surged over recent years due to its decent performance relative to both its sector and benchmark.
According to FE Analytics, the fund – which sits in the IA Global sector rather than Global Equity Income sector due to the manager’s focus on income growth instead of headline yield – beat its peer group and MSCI AC World benchmark in every full calendar year between its launch in 2008 and 2013.
Despite that, M&G Global Dividend is currently underperforming against the index over one, three and five years due to its bottom-quartile returns in 2014 and so far in 2015. Our data shows that since the start of 2014 it has returned 6.76 per cent, which is nearly three times less than its sector and benchmark’s returns.
Performance of fund versus sector and index since January 2014
Source: FE Analytics
One of the major explanations given for that drop in performance has been the growing AUM. FE data shows it was £3bn this time three years ago and peaked at £9.5bn last year, but now stands at £8.5bn.
However, Amandine Thierree – fund analyst at FE Research – says that there were other factors at work.
“Firstly, oil. They realised afterwards that some stocks in the portfolio were more sensitive to the oil price than they expected and this hurt the fund in the second part of the year,” Thierree said
“Then there was their US allocation, as they were slightly underweight throughout the year and were taking profits in their US holdings but US equities kept the momentum and gained around 20 per cent by the end of the year.”
Thierree also points out that there were certain stock disappointments like Macau Gaming and portfolio calls such as selling “quality” stocks too early.
She added: “So far this year they have had to face a lot of redemptions which I believe is the consequence of last year’s underperformance. Performance-wise, I believe no allocation to Japan is weighing on relative performance and the Macau gaming stocks are still detracting.”
Ben Willis, head of research at Whitechurch, says that while size was the major reason he sold the fund last year, he agrees that the recent underperformance has come down to certain stock and sector calls.
As a result, Willis says that the fund can bounce back from here despite its size but is happy to avoid it for the time being and is using a combination of regional equity income funds instead.
M&G Global Dividend yield’s 3.09 per cent and has an OCF of 0.91 per cent.
James Harries’ Newton Global Income fund (formerly Newton Global Higher Income) is by far one of the most popular in its sector and is certainly the largest with an AUM of £4.5bn.
The manager’s thematic and relatively cautious approach meant the fund, which was launched in November 2005, was one of the best-performers in its early years. Our data shows that in its first five years it was the second best performer in the sector with returns of 48.73 per cent, beating the FTSE World index by more than 20 percentage points.
However, while it is still outperforming over the longer term investors will have no doubt noticed that, except for 2011, the fund has underperformed relative to its benchmark in five of the last six calendar years – meaning it is down against the index over one, three and five years.
Source: FE Analytics
Nevertheless Apollo’s Ryan Hughes says investors should not be concerned about the Newton fund as it is a defensive portfolio which has underperformed in what has been a largely rising market. FE Trustnet highlighted Harries’ bearish views in an article last year.
While some may say Harries could have afforded to be more flexible in his approach, Hughes says investors should applaud the manager for sticking to his stance that the market is distorted and also should view its recent lacklustre returns as a buying opportunity.
“I rate Harries and it is a fund we have used a lot in the past. Newton have a disciplined philosophy and approach which has stood the test of time but what we have seen recently is that more growth-orientated stocks have performed well and that isn’t an area Harries typically buys,” Hughes said.
“I think the fund is performing entirely in line with expectations because when you have period like we have seen, it is going to struggle.”
“I’m a firm believer that investors should know exactly what they are buying and if Harries was outperforming in this environment, I would have more questions for him as it would suggest he was doing something that he told us he wouldn’t do.”
He added: “So I have no problems with the fund at all.”
Newton Global Income has a yield of 3.36 per cent and an ongoing charges figure (OCF) of 0.8 per cent.
Veritas Global Equity Income
While not a household name with retail investors, Veritas Global Equity Income had been the most popular in its sector with professional investors as it was the most widely held global equity income with multi-managers in 2013 – and it is easy to see why.
The Veritas fund, which is headed up by the FE Alpha Manager duo of Andy Headley and Charles Richardson, had been the best performing portfolio in the sector between its launch in February 2005 and January 2013 and had nearly doubled the returns of its MSCI World benchmark with gains of 100 per cent.
It had also outperformed the index in six of its first seven calendar years, including 2008 when it lost half as much as its benchmark and in 2011 when it made 0.26 per cent while the wider market lost 5 per cent.
However, since then the £3.2bn fund has struggled. Our data shows it was bottom decile in 2013 and 2014 and is currently underperforming in 2015 – which means it is now a bottom-quartile performer over one, three and five years.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
Henderson’s James de Bunsen says there have been a number of key reasons why the fund has gone through such a tough period of underperformance.
“It’s basically because they haven’t had anything in US equities which have done incredibly well,” de Bunsen said.
“The team try to generate a premium yield but they are not prepared to over-pay. Both of those reasons mean the US has been a barren area for them because yields have been so compressed and valuations have been so stretched.”
“I’d also say they have had direct and indirect exposure to emerging markets over that time.”
FE data shows Veritas Global Equity Income has just 12.4 per cent in the US, compared to its benchmark’s weighting of close to 60 per cent. Headley and Richardson then hold 33 per cent Europe, 25 per cent in Asia and 30 per cent in the UK.
However, it is because of that positioning that de Bunsen believes that Veritas Global Equity Income will outperform from here. He thinks Europe and Asia will continue to perform well due to central bank stimulus while the US is now very overvalued.
“We have had a couple of meetings with them recently to check they are still sticking to what we think they are a good at. The worry is that they start to take a different approach because they are scared about lagging against the benchmark, but we are confident they are standing by their process,” de Bunsen added.
Veritas Global Equity Income, which is highly concentrated with just 25 stocks, yields 4.7 per cent and has a total expense ratio of 1.13 per cent.