Investors seek exposure to global equities should consider the Scottish Mortgage and Monks investment trusts, as both of these vehicles offer a compelling story when it comes to this challenging asset class.
Moving over to global equities is one of the easiest ways for UK investors to diverse their portfolios, but performance data suggests it can be difficult to find global funds that can outperform the market over the long term.
FE Analytics shows that the FTSE All World index has witnessed an 88.14 per cent total return over the past 10 years. In comparison, the average open-ended fund in the IA Global sector has gained just 57.02 per cent over this time.
Performance of sector vs index over 10yrs
Source: FE Analytics
Giving their investment trust recommendations for 2016, Winterflood research analysts Simon Elliott, Kieran Drake, Innes Urquhart and Emma Bird opt for one of the portfolios that has managed to beat the FTSE All World over the past 10 years – the Scottish Mortgage Investment Trust. 
Winterflood describes the trust as “the outstanding success story of the investment trust sector in recent years”. With assets of £3.3bn, Scottish Mortgage is the largest listed closed-ended fund in the UK and has proven to be very popular with retail investors.
James Anderson (pictured) and Tom Slater, the managers of the three FE Crown-rated trust, have an unconstrained mandate and attempt to identify strong businesses with the potential for asymmetric returns. The managers are currently investing in themes such as the speed of technological advances and the re-emergence of China as an economic superpower.
“We believe the investment approach under James Anderson and Tom Slater of Baillie Gifford is well established,” the analysts said.
“However, there will be times when the managers’ views are at odds with the market and this could result in volatile performance, exacerbated by its gearing, which is currently equivalent to 12 per cent of net assets.”
“Despite this, we are confident that Scottish Mortgage is well placed to outperform over the long term and in benign market conditions. The fund also benefits from one of the lowest fees in the investment trust sector at just 0.3 per cent of net asset value.”
On a total return basis, Scottish Mortgage has been the second best performing trust in the AIC’s Global sector over the past 10 years with a 215.71 per cent gain. This is also significantly higher than the 85.10 per cent rise in the FTSE All World over this time.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
The fund also sits in its sector’s top quartile over three and five years, but does slip into the second quartile over one year. However, it’s important to note that this is a relatively short time frame for looking at its performance as it has the aim of beating its benchmark over rolling five-year periods.
Scottish Mortgage’s key investment themes are clear when its top holdings are considered.
Amazon is the largest holding with a 9.8 per cent, while other stocks linked to technological advance include Facebook and Google parent company Alphabet. When it comes to the re-emergence of China, the trust has significant weightings to the likes of web services group Baidu and e-commerce company Alibaba.
Tying this together in their latest investment report, Anderson and Slater said: “The relatively recent developments of e-commerce and social media still have a considerable amount of structural growth potential. Yet it is the application of the technologies which have underpinned these two shifts to a range of other industries which is particularly firing the enthusiasm of the managers.”
“The managers strongly believe that we are on the cusp of transformative change in a range of areas, including healthcare, transportation and energy. As with e-commerce and social media, the managers believe the majority of the value created by these shifts may well be concentrated in the hands of a few extraordinary companies, whose positions are reinforced by scale and network effects, giving rise to the potential for greater longevity of growth.”
Winterflood highlights another Baillie Gifford-managed investment trust as a good option for those seeking global equity exposure: Monks Investment Trust.
This £869m trust has underperformed over recent years. It sits in the AIC Global sector’s third quartile over three and 10 years, with a dip into the fourth quartile on a five-year view; it is also lagging its FTSE World benchmark by a wide margin over five and 10 years.
However, Charles Plowden was named lead manager of the portfolio in March 2015 with Malcolm MacColl and Spencer Adair joining as deputies at the same time. Since then, the fund’s 4.58 per cent loss compares favourably with the 7.74 per cent fall in the benchmark, although it is still behind its average peer.
Performance of fund vs sector and index under Plowden
Source: FE Analytics
“The management of Monks now comprises three of Baillie Gifford's 19 investment partners, and includes Charles Plowden who is joint senior partner,” Winterflood’s analysts said.
“There is clearly a determination within Baillie Gifford to turn around the fortunes of Monks after several years of disappointing performance. The strategy now being used has a long and successful record and draws on the best ideas of Baillie Gifford's research capability.”
Plowden and his team run the trust along the same lines as their Global Alpha strategy, which has established a strong long-term track record in the open-ended space and is now closed to new investors. They take an unconstrained approach to investment and the portfolio is split into a number of thematic risk categories.
“The largest, at 39 per cent of the portfolio, comprises those stocks that we consider to be less sensitive to the progress of the overall economy. This includes technology stocks as well as consumer staples,” the managers said in their latest report.
“The next biggest area is US economic re-emergence, which captures a range of industrial and consumer stocks as well as some potential beneficiaries of higher interest rates. The balance of the portfolio is linked to the continuing progress of emerging markets and the prospect of economic recovery in Europe and Japan.”
Monks’ top holding is Prudential at 3.4 per cent while it also has positions in Royal Caribbean Cruises, Ryanair and TD Ameritrade. It does share some holdings in common with Scottish Mortgage – Amazon and Alphabet are stocks found in both top 10s – but Winterflood puts the overlap between the two portfolios at just 16 per cent by value.
Highlighting further differences between the two, the analysts added: “The fund is more diversified than its stable mate Scottish Mortgage and we would expect returns to be more moderate, on both the up and down side.”
“The initial performance under the new team and strategy is encouraging and we believe that Monks offers an attractive option for low cost core global equity exposure.”
Scottish Mortgage has ongoing charges of 0.45 per cent, yields 1.03 per cent and is trading on a 2.84 per cent premium; Monks Investment Trust charges 0.58 per cent, is 4 per cent geared, yields 1.99 per cent and is trading on a 7.96 per cent discount.
