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The top-performing global fund – you’ve never heard of

21 January 2016

This fund has beaten its benchmark by more than eight times since launch and grown to £2.7bn, but is still a relatively unknown offering in the UK.

By Alex Paget,

News Editor, FE Trustnet

Investors are hard pushed to find a global equity fund that has consistently added value.

Various FE Trustnet studies over the past year or so have found that, despite managers in the space having the whole world to choose opportunities from, active global funds have tended to significantly underperform the MSCI AC World index.

For example, the IA Global sector has returned some 20 percentage than less the index, which most use as a benchmark, over the past 10 years. On a discrete annual basis, the sector has underperformed in seven of the last 10 calendar years.

Performance of sector versus sector over 10yrs

 

Source: FE Analytics

What is even more damning, though, is that if you were to remove all of the funds in the highly competitive sector that simply track an index or focus on niche areas of the market such as healthcare, industrials or smaller companies, less than 30 per cent of the active IA Global peer group have outperformed the index over the past decade.

However, as is always the case in investment terms, there are those that have bucked the trend.

One of the global active funds to have done so is one which is very unknown within the UK investor community: Skagen Global.

The reasons for that are relatively simple as the fund is based in Norway and until recently the group has spent very little time marketing it in the UK. In fact, this process is still very much ongoing given it is unavailable on the large majority of platforms.

However, the group is aiming to increase its UK wholesale market presence and there is little doubt that the £2.7bn fund’s past numbers are quite easy to market.

According to FE Analytics, Skagen Global has been the best performing portfolio in the IA Global sector since its launch in August 1997 with returns of 1,159.85 per cent, meaning it has beaten its benchmark by more than eight times over in the process.

Performance of fund versus sector and index since launch

  

Source: FE Analytics

On top of that, the fund has beaten the index in 14 of the last 18 years and is comfortably outperforming on a 10-year view.

Knut Gezelius, who is co-manager on the fund, says the principle driver of that outperformance is the team’s focus on value stocks and bottom-up process.

In that regard it is run along the same lines as the group’s Skagen Kon-Tiki fund, which focuses on the developing world and has a similar track record of outperformance relative to the MSCI Emerging Markets index.

“It is very much a bottom-up, value-driven approach. We are contrarian, high conviction and base our investments on common sense,” Gezelius said.

“We usually talk about the three ‘Us’ and each investment we like should have these three criteria: unpopular, under-researched and undervalued. That’s the philosophy our founder Kristoffer Stensrud pioneered and has stood us in good stead ever since.”


 

It must be noted, however, that the fund’s long-term outperformance was largely accumulated in its early years.

For example, it beat the benchmark in each calendar year between 1998 and 2007. It is only since then that its four calendar years of underperformance have occurred: 2008, 2011, 2013 and 2014. It means Skagen Global is therefore bottom quartile and significantly underperforming the index over three and five years.

However, this is a period where Skagen Global’s value focus has been largely out of favour.

The graph below shows the relative performance of the MSCI AC World Growth and MSCI AC World Value indices. As can be seen, growth stocks have by and large outperformed their value counterparts since early 2007.

Relative performance of indices over 10yrs

 

Source: FE Analytics

There are a number of reasons why this has been the case.

First and foremost, sentiment towards risk assets has tended to be low since the global financial crisis with investors, who still feel the effects of 2008’s significant falls, favouring ‘safer’ names compared to more economically sensitive stocks.

On top of that, thanks to ultra-low interest rates and quantitative easing from the world’s central banks, certain fixed income investors have been forced out of the bond market for an acceptable level of yield and one of their preferred destinations have been high quality growth stocks with reliable dividends.

“It’s a difficult question to answer as to why value has been out of favour since 2007. Between 2007 and 2014, value only outperformed growth in 16 months,” Gezelius said.

There are a lot of factors behind that. Given where growth rates are in the world and where we are today, there has been an attraction towards companies which are growing. They have liked to get that growth, but so far, pay more for it and then even more for it.”

“For us, there is a point where you have to say there is a limit so we haven’t wanted to get drawn into that game.”

There are many market commentators who, following its dismal run, believe value investing will come back into favour.

Gezelius says there is no clear indication of when this might happen, but says potential catalysts would be improving GDP growth, higher inflation or simply another rout in global value stocks.

He added: “They [value stocks] have been hit hard, but of course, they could be hit even harder.”


 

Certainly, value stocks have once again borne the brunt of the recent market falls with the MSCI United Kingdom Value index down 10.35 per cent already in 2016 compared to a 7.39 fall from the MSCI United Kingdom Growth index.

That difference is even more pronounced over the past 12 months

Performance of indices over 1yr

 

Source: FE Analytics

The manager says, however, that is presents a very interesting opportunity for investors.

“One question that I ask is: what changed between 31 December and today?”

“There hasn’t been a whole lot of new data coming out – some about Iran and oil but that’s been known for several months – so is there any reason for a short sell-off because of data? No, I don’t think so.”

“Maybe the market was due to correct from its steady uptick, but to us the sell-off looks over done and looking at different indicators such as those focusing on US retail investors and they are at very, very low levels.”

“People are now almost beginning to panic and sell everything and, to us, that’s a buying opportunity. We’ve been buying over the past few weeks. This sell-off has been sentiment driven rather than anything to do with fundamentals.”

For example, Skagen Global’s cash level has come down from 5 per cent (which had been built up during the market rebound after August’s Black Monday) and, as a result, the fund is almost fully invested.

Currently, the fund is overweight industrials, materials and financials but underweight the likes of consumer staples and healthcare. Gezelius and his team is also largely avoiding the US, but overweight areas such as the emerging markets and the UK.

Skagen Global has ongoing charges of 1 per cent. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.