There are a number of funds in the IA global sectors that managed to significantly outperform their benchmarks by making bold, differentiated judgment calls, according to research from FE Trustnet.
While many investors like to hold funds in the IA Global and IA Global Equity Income sectors for regional diversification purposes, both peer groups are renowned for underperforming the MSCI AC World index over both medium and longer-term time frames.
According to data from FE Analytics, both sector averages are down against the index over one, three, five and 10 years as well as over the last six months, with the gap in performance widening over the long term.
Performance of sectors vs index over 10yrs
Source: FE Analytics
While there is no clear-cut reason for this, a lot of investment professionals have supposed that this is due to many managers being underweight the efficient yet expensive US market.
Others have also said achieving genuine diversification in such a broad sector is challenging, or pointed out that meeting each individual management team is more difficult when they are spread across the entire globe.
That said, there are a number of funds in the sectors that have stepped away from their benchmarks to generate high levels of alpha, have used their knowledge and skills as active managers to enhance returns (as measured by its information ratio) and consequently outperformed the MSCI AC World index.
In the below article, FE Trustnet takes a look at a selection of five of these which, over five years, have delivered top-quartile alpha (which measure of a fund’s out or underperformance in comparison to the benchmark) and information ratios (which assesses the degree to which a manager uses skill and knowledge to enhance returns) compared to the MSCI AC World index as well as top-quartile total returns.
First up is FE Alpha Manager Terry Smith’s Fundsmith Equity, which has five FE crowns and was launched by the manager during the second half of 2010.
The £5.8bn fund is renowned for its long-term and high concentration portfolio, which will hold between 20 and 30 stocks at any one time and only consists of holdings that have a minimum of 10 years’ profitability and free cash flow yields.
In order to narrow down a broad investment process to such a small number of holdings, Smith and his team also look for companies that have well-known brands names, patents and strong distribution networks – these filters immediately narrow down the investable universe from 60,000 companies to less than 100.
Examples of its largest current weightings include Imperial Brands, Johnson & Johnson, Dr Pepper Snapple Group and Microsoft.
Because of this investment process, the portfolio is highly diversified away from the benchmark and has the highest combined alpha generation and information ratios in both global sectors over five years.
This appears to have paid off, with the fund more than doubling the performance of its MSCI World benchmark, the MSCI AC World index and its sector average over one, three and five years.
Performance of fund vs sector, index and benchmark over 5yrs
Source: FE Analytics
It also has a top-quartile Sharpe ratio (which measures risk-adjusted returns) and maximum drawdown (which measures the most potential money lost if bought and sold at the worst possible times) over five years.
Fundsmith Equity has a clean ongoing charge (OCF) of 0.97 per cent.
Next on the list for its alpha generation and information ratio over five years is Lindsell Train Global Equity, which comes in fourth place below two specialist global healthcare funds (which would of course have portfolios vastly different from the index, given their mandates).
Lindsell Train Global Equity has been managed by Michael Lindsell since 2011, who was later joined by co-manager and co-founder of the firm FE Alpha Manager Nick Train, who took to the helm of the fund in 2015.
The five crown-rated fund is benchmarked only against its sector but, despite this, it has vastly outperformed the MSCI AC World index over one, three and five years, as well as over the last one, three and six months. It also has a top-quartile Sharpe ratio, maximum drawdown and annualised volatility over five years.
Similarly to Fundsmith Equity, the managers adopt a highly-concentrated approach to building their portfolio, with their largest position Unilever accounting for 8.40 per cent of the fund and its top 10 holdings accounting for more than 60 per cent of the portfolio.
Lindsell, Train and fellow co-manager James Bullock look for stocks that have well-established brands and genuinely long-term sustainable business models – its largest holdings include Diageo, Relx and Walt Disney.
In terms of region, the £1.4bn fund is underweight the US versus the MSCI AC World, is very overweight the UK and Japan and has no exposure whatsoever to emerging markets.
Lindsell Train Global Equity has a clean OCF of 0.84 per cent.
Investec Global Franchise is in third place for its alpha and information ratio and has also delivered a top-quartile total return over five years.
It has been headed up by FE Alpha Manager Clyde Rossouw since the end of 2011 and, over this time frame, it has provided a total return of 76.21 per cent, outperforming its MSCI AC World and sector average by 18.71 and 29.46 percentage points respectively.
Performance of fund vs sector and benchmark under Rossouw
Source: FE Analytics
The £1.7bn fund has a focus on high-quality stocks and, like the aforementioned funds, holds large weightings in the likes of Johnson & Johnson, Imperial Brands and Microsoft.
Regionally, the three crown-rated fund’s biggest overweight is the UK with an allocation of 19.1 per cent, which is more than triple that of the index. It is also overweight Switzerland, Belgium and Israel while its largest underweight is the US by 4.4 percentage points.
In terms of sector, it is heavily overweight the consumer staples sector by 31.5 percentage points and is underweight financials by 13.4 percentage points with just a 7 per cent weighting.
Investec Global Franchise, which also has a maximum drawdown that is lower than its benchmark and sector average over Rossouw’s tenure, has a clean OCF of 0.86 per cent.
Next up is Old Mutual Global Equity, which has five FE crowns and has been managed by Ian Heslop, Amadeo Alentorn and Mike Servent since 2004.
The fund is £354m in size and is overweight the US versus the MSCI AC World index, with Apple, Alphabet, Amazon, Intel and PepsiCo as its top five holdings.
Unlike the previously mentioned funds, the managers of Old Mutual Global Equity have a large number of holdings in their portfolio at 619, with the aim of being as diversified as possible across the entire investable global universe.
The five crown-rated fund has provided a top-quartile total return over one, three, five and 10 years, having outperformed its sector average and MSCI World benchmark by 51.98 and 19.42 percentage points respectively over the last decade.
In terms of risk metrics, the fund has a top-quartile Sharpe ratio and maximum drawdown over one, three and five years, although it has a bottom-quartile maximum drawdown over the last decade due to lacklustre returns in 2007 and 2009.
Old Mutual Global Equity has a clean OCF of 1 per cent.
The fifth global fund with the highest alpha and information ratios over five years is Trojan Global Equity, which is headed up by Gabrielle Boyle.
In line with the fund management house’s cautious investment philosophy, the three crown-rated fund has a top-decile annualised volatility, Sharpe ratio and maximum drawdown over five years and has been awarded an FE Risk Score of 74, which estimates that the fund is 74 per cent as risky as the FTSE 100.
The fund has also managed to consistently outperform its MSCI World benchmark over one, three and five years and has approximately doubled the performance of its sector average or more over all of these time frames.
Over the last year, in fact, the three crown-rated fund has provided a total return of 11.07 per cent compared to its benchmark’s return of 1.97 per cent and its average peer’s loss of 1.82 per cent.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
The fund has a concentrated portfolio of 34 holdings and has a 50 per cent weighting in North America, 22 per cent in the UK, 15 per cent in Europe and 6 per cent in Asia – the remaining 7 per cent is held in cash.
Its largest holdings are well-known large-caps based in developed countries and include the likes of Novartis, Microsoft and American Express.
Trojan Global Equity has a clean OCF of 1.13 per cent.
