Investors concerned about the impact that international headwinds such as slowing growth in the US and China’s hard landing risk could look at UK funds such as MFM Slater Growth, ConBrio Sanford Deland UK Buffettology and Unicorn UK Income, as FE Trustnet research shows they have had a low correlation to global markets.
There is an ongoing debate going on among UK investors at the moment, concerning how their exposure should be positioned – towards the domestic market or the global one.
While focusing on UK domestic-facing stocks could be beneficial given the relative strength of the UK economy compared with other major international markets, there is the overhanging risk that a ‘Leave’ victory in the Brexit referendum would cause a period of significant volatility for the FTSE All Share.
On the other hand, UK stocks that are more geared into the global economy could allow investors to dodge this potential issue and reduce the reliance on the fortunes of the domestic economy. However, with signs that global economic growth is slowing, this could bring problems of its own.
Richard Troue, head of investment analysis at Hargreaves Lansdown, said: “The UK economy has shown quite a bit of resilience more recently and is in a reasonably good place, so when considering exposure to the UK you do need to think to what extent companies are exposed to global trends, especially when it comes to large-caps.”
“That would often mean looking more towards a multi-cap fund, where the manager can go down the market cap into some of the more domestically focuses mid and small-caps, or even seeking out a specific mid or small-cap fund.”
So if investors are looking to minimising the global exposure of their UK funds, where should they look for ideas?
Source: FE Analytics
The tables above show the IA UK All Companies and IA UK Equity Income funds with the lowest correlation to the MSCI World over the past five years. As can be seen, it tends to be IA UK All Companies funds that have the lowest correlations (partly down to it being a larger sector) as a number of equity income funds have what is considered a strong correlation.
Within the IA UK All Companies, it’s also clear that those with a mandate to invest further down the market cap spectrum have been less swayed by movements in global markets.
The fund with the lowest correlation to the MSCI World index – Elite Webb Capital Smaller Companies Income & Growth – makes its focus on smaller companies clear through its title. Unicorn UK Growth, MFM Slater Growth and MFM Slater Recovery, however, also have high weightings to this part of the market.
The latter three of these funds have outperformed both the MSCI World and the FTSE All Share over the past three years with MFM Slater Growth leading the pack with a 62.72 per cent total return. Elite Webb Capital Smaller Companies Income & Growth is underperforming both, however.
It must be noted that MFM Slater Recovery and the Elite Webb Capital fund are lagging both indices on a five-year view.
Performance of funds vs indices over 3yrs
Source: FE Analytics
Another fund with a strong track record is ConBrio Sanford Deland UK Buffettology fund, which holds five FE Crowns. It was the highest returning member of the IA UK All Companies sector in 2015 after making 27.86 per cent and outperforming its average peer by 23 percentage points in the process.
As Troue noted, mid-caps can also offer more exposure to the domestic market. Neptune UK Mid Cap fund has had a 0.56 correlation to the MSCI World over the past five years and has outpaced this index as well as the FTSE All Share by a significant margin over one, three and five-year periods.
Looking to the IA UK Equity Income sector and Henderson UK Strategic Income has the lowest correlation to global equities. This is a fund of investment trusts but is currently sitting in the fourth quartile over three and five years.
The next two funds on the list – Unicorn UK Income and Chelverton UK Equity Income – have some of the strongest track records of sector over three and five years. Both invest heavily in small-caps, explaining their outperformance in recent years and the low correlation to the MSCI World index.
However, the bottom seven funds, which include well-respected offering such as Standard Life Investments UK Equity Income Unconstrained and Trojan Income – have a correlation to the index of more than 0.70, which is considered to be high.
The reason why most equity income funds have a higher correlation to global equities is explained by their typical holdings: large dividend-paying businesses that rely on overseas markets for the revenue and whose share prices can be moved by global macroeconomic news.
Flipping matters on their head, the tables below show the funds in the two sectors that have the highest correlation to the MSCI World.
Source: FE Analytics
Being included in this table is not necessarily a bad thing and many of those listed above are highly regarded, such as CF Lindsell Train UK Equity, Franklin UK Opportunities and Neptune Income.
Troue says that investors should not move all their portfolio into UK funds that have little correlation with global markets, as maintaining some exposure to the world economy is a prudent idea.
“It’s important to have some diversification,” he said. “Just as you might not want too much exposure to the global markets or some sectors within them, you don’t necessarily want to be tilted entirely towards the UK either. Making sure you have a good balance is the key.”
