Focusing on just a small subset of global equities, adopting an ESG approach to investing and being unafraid to steer clear of entire regions are some of the reasons that a handful of global funds have beaten the MSCI AC World index, according to their managers.
Funds in the IA Global and IA Global Equity Income sectors are renowned for underperforming their benchmarks. Data from FE Analytics shows that, out of 297 funds within the market area, almost two-thirds have underperformed the MSCI AC World index over three years and just 80 funds have outperformed it over five years.
The index has also beaten both sectors during six out of the last 10 years on an annualised basis. This means that, over the last decade, the IA Global and IA Global Equity Income sectors have underperformed the MSCI AC World by 31.49 and 16.17 percentage points respectively.
Performance of index vs sectors over 10yrs
Source: FE Analytics
While the reasons for this aren’t entirely clear, there has been supposition from various investment professionals. In an article published two years ago, Equilibrium’s Mike Deverell (pictured) told FE Trustnet that many global funds are essentially closet trackers given that they are often more expensive than domestically-orientated funds and that the managers are often London-based and have limited access to global companies. 
“Two things that are going to help you outperform are low charges and a high active share and in this sector they have high charges and a low active share, so expensive trackers are often what you get,” he said.
Another FE Trustnet article suggests that many global equity funds are too concentrated for the sheer number of stocks in their investable universe.
David Hogarty, manager of the KBI Dividend Plus Developed Equity fund, said: “A lot of fund managers cut their teeth with regional portfolios and global mandates are a relatively new concept. However, some have tried to repeat those same portfolio construction rules [that they used in regional funds] with a global mandate and it doesn’t work.”
Given the complexities of investing in this part of the market, FE Trustnet has spoken to a number of fund managers that beaten either the MSCI AC World or MSCI World indices over both medium and long-term time frames.
Lewis Grant, who co-runs Hermes Global Equity, says that a strong emphasis on corporate governance and looking for companies that are on the path to reducing their environmental and social risks are good ways to outperform the index.
Hermes Global Equity, which he has co-managed since 2008, has outperformed the MSCI AC World over three and five years, beating the index by 7.85 percentage points with a return of 81.47 per cent over the last five years and placing it in the top quartile of its sector.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
“Our objective was to create a strategy that delivers consistent outperformance, so it’s just a little bit of alpha every quarter. This means that short term it looks a little bit boring very deliberately, just so we can be a little bit ahead every quarter. Then over the long term, compound interest takes care of the rest,” he said.
“Our main idea is that, when we quantify companies from an ESG perspective, it’s not about looking at which is the green company and which is not, it’s about identifying which company has got its own exposure to environmental risks and social risks, each company has its own standards of corporate governance.”
“A company that is less exposed to environmental clean-up costs than its peers of course has a better chance of delivering higher profits over time because it’s not going to be spending it elsewhere.”
FE Alpha Manager James Thomson, who runs the four crown-rated Rathbone Global Opportunities fund, attributes his outperformance of both the MSCI World and MSCI AC World indices over three, five and 10 years to Rathbone’s global investment philosophy. This involves adopting a bottom-up, unconstrained and at times contrarian growth approach, as the manager believes that there is often a bias towards value companies within the global space.
“[Global managers] obviously face the challenge of a much larger number of stocks to choose from. However, the investment philosophy we have developed at Rathbones, which we lovingly call our ‘secret sauce’, is a good way to filter out ideas and target just the most exciting growth companies in the world,” he said.
“We believe that many investors appreciate the willingness to diverge from the benchmark: if there’s a country or sector we don’t like we can just have zero exposure. And we also are willing to admit our shortcomings. For instance, we don’t think we have the skills of expertise to invest sensibly in some parts of the world, such as emerging markets, so we don’t.”
Performance of fund vs sector and indices over 10yrs
Source: FE Analytics
William Davies, who is head of global equities at Columbia Threadneedle and runs the Threadneedle Global Select fund, says that choosing a fund with a strong, experienced and co-operative research team is important in the hunt for a global fund that can outperform the market.
His £1bn fund, which he took over in 2012, has outperformed its MSCI AC World benchmark over one, three and five years as well as over one and three months. It is also in the top quartile versus its peers over one and three years.
“The role of the global equity fund manager is to not only to put their own ideas into a global context but also those of our colleagues, so that we come up with high conviction ideas in a well-diversified global equity portfolio within a fund’s risk parameters,” he said.
“We are very fortunate at Columbia Threadneedle in that we have strong idea generation from both. The cooperation and collaboration shown across teams is paramount in sorting through the myriad of investment opportunities in the most efficient and effective way. This teamwork is critical to achieving sustained outperformance.”
The team behind FE Alpha Manager Ian Warmerdam’s Henderson Global Growth fund says that one of the biggest challenges for global managers above any other area of the market is the breadth of the universe to choose from when constructing a portfolio.
Because of the large variety of information available and the sheer number of equities to choose from, it warns that genuine long-term opportunities can get lost amid shorter term noise.
“We overcome this challenge by entirely focusing our efforts on what we believe to be the much smaller investable subset of this universe,” it said.
“When one is making investment decisions based upon a truly long-term horizon, many parts of the market become unattractive, as the potential for competitive differentiation does not hold. We believe that operating in the quieter arena of long-term analysis lends us a distinct advantage in this regard as many market participants remain fixated on short-term price movements.”
Henderson Global Growth has significantly outperformed its MSCI AC World benchmark over three, five and 10 years (although it must be noted that Warmerdam has been at the fund’s helm since 2009) and is in the top quartile versus its peers over these time frames.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Gabrielle Boyle, who runs the four crown-rated Trojan Global Equity fund, has also managed to deliver strong returns versus the MSCI World benchmark and has outperformed the index with top-quartile returns over one, three and five years. Again, while the fund has also outperformed its benchmark over 10 years, it must be noted that the manager has been running the fund since 2011.
“We concentrate our efforts on trying to understand the fundamentals of the businesses we invest in and their competitive threats and challenges rather than spending too much time on all of the other big picture concerns which tend to dominate the lives of fund managers,” she explained.
“Performance over the past few years has very much been driven by stock selection with particular highlights including investments in companies whose revenues, profits and cash flows have grown very consistently as the businesses have adapted to a world of lower growth and profound technological change.”
“Portfolio turnover is very low as once we have found these special companies we aim to let them do the work for us by compounding strong returns over time.”