Global funds are renowned for failing to outperform their benchmarks, with only 78 out of 272 funds outperforming the MSCI AC World index over five years, according to data from FE Analytics.
The peer average in the IA Global sector has underperformed the index over one, three, five, 10, 15 and even 20 years, despite the fact managers in the peer group have literally the whole world to choose from for ideas and even though it is the second-largest sector in the Investment Association universe with £82.3bn of funds under management. 
In an article published in May, KBI’s David Hogarty told FE Trustnet that a combination of high concentration portfolios, fund managers’ overreliance on meeting management teams and basing investment decisions on sector performance has contributed to the peer group’s underperformance.
“The argument for being underweight or overweight a sector is based on the complete fallacy that it helps you outperform. Stocks within sectors don’t all act the same. Trying to decide which sectors you are overweight or underweight is a waste of time; it’s a red herring,” he said.
Laith Khalaf (pictured), senior analyst at Hargreaves Lansdown, believes that one of the reasons that the IA Global sector has underperformed is because of its general home bias towards the UK, whereas the MSCI AC World index is heavily weighted towards the US.
“Over periods when the US is doing well, particularly recently, you’ll tend to find that the sector lags behind the benchmark because its geographical allocation is more weighted towards the UK – Conversely, if the UK is outperforming then I would expect it to do a bit better.” he said.
Performance of sector vs index over 10yrs
Source: FE Analytics
“The other thing is that there tend to be a few specialist funds in that sector as well, and there are quite a few resources funds within it, which have had a pretty bad time of late. This also may explain some of the funds underperforming – they’re global funds but they’re in mining-related stocks, for instance.
Despite the disappointing performance of the sector average, however, there are some popular global funds that boast high alpha scores and have consistently outperformed the benchmark and have therefore justified their often higher charges.
An example is Old Mutual Global Equity, which has achieved a top-decile return of 116.58 per cent over five years, which is more than double the performance of its peer average and 43.57 percentage points more than the MSCI World index.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Not only this, it has been the only fund in the sector to have beaten its benchmark and delivered top quartile returns in each of the past five calendar years.
The £262m fund, which also has top-decile alpha generation relative to the index over the same time period, has been managed by Amadeo Alentorn, Ian Heslop and Mike Servent since 2004.
As opposed to having a value or growth bias in the fund, the managers adopt a screening process using quantitative research to create a more blended portfolio. The managers claim this approach allows the fund to perform well across the cycle.
Old Mutual Global Equity has a clean ongoing charges figure (OCF) of 1 per cent and yields 0.97 per cent.
Another global fund that has managed to outperform regularly is Rathbone Global Opportunities, which has been headed up by FE Alpha Manager James Thomson since 2003.
The £564m fund is only benchmarked against its sector, but has still managed to outperform the MSCI AC World index, as well as its sector average, over one, three, five and 10 years and has remained top-quartile over these time frames.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
However, the fund didn’t fare so well during the financial crisis of 2008 when it plummeted to the bottom-decile with losses of 39.39 per cent, meaning it fell twice as much as the MSCI AC World index that year.
Since then, however, Thomson has adjusted his approach to make sure he doesn’t fall foul of owning highly leveraged companies. This approach has worked so far as Rathbone Global Opportunities has outperformed the sector in each of the last five years and is up against the index in three of those.
The fund, which has a clean OCF of 0.8 per cent and yields 1.1 per cent, has made its way onto the FE Research Select 100 list. However, the FE Research team has recommended holding the fund at the moment, following a period of erratic performance last year.
“The fund has been hit by a classic problem with growth stocks: companies which had become very expensive sold off quickly as investors became more wary,” the team explained.
“The manager has developed an approach which limits the damage to the fund when markets fall. Nonetheless, it is still very much a fund that is likely to do best when the economy is improving and stock-markets are rising.”
Artemis Global Growth also boasts solid performances over the longer term and is managed by Peter Saacke.
Over his tenure, which began in 2004, the £414m has returned 227.21 per cent, outperforming its benchmark and sector average by 78.95 and 97.53 percentage points respectively.
Performance of fund vs sector and benchmark over management tenure
Source: FE Analytics
Martin Bamford, chartered financial planner and managing director at Informed Choice, said: “This fund is an exceptional performer, returning 21.18 per cent over the past year against a sector average of 10.68 per cent, so close to double the average.”
“Outperformance appears to have come from the lack of restrictions placed on the fund and manager. Peter Saacke can invest in any size company, any sector and any geographical area. Many global funds are constrained by their benchmarks, so a fund like Artemis Global Growth has the freedom to do what Artemis aim to do, hunt profits.”
Currently, the fund has a 38.7 per cent weighting in North America, a 23.3 per cent weighting in Europe ex UK and 22.5 per cent in global emerging markets. Artemis Global Growth also has smaller weightings in the UK, Japan and Asia Pacific.
The fund has a clean OCF of 0.88 per cent and yields 1.38 per cent.
Another global fund that offers an unconstrained portfolio is Baillie Gifford Long Term Global Growth, which is managed by Mark Urquhart and has achieved top-decile returns over one, three and five years.
Also boasting a top-quartile Sharpe ratio, which measures risk-adjusted returns, and top-quartile alpha generation, the £212m fund has achieved its best performance over the medium term, providing a total return of 102.41 per cent over five years compared to its sector average’s return of 55.55 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Other global funds that are worthy of note for their outperformance of their sector average and benchmark are Michael Lindsell’s Lindsell Train Global Equity, FE Alpha Manager Douglas Brodie’s Baillie Gifford Global Discovery and the five FE Crown-rated JOHCM Global Select, which is managed by Christopher Lees and Nudgem Richyal.
