When UK investors think of top-performing global funds, usually one in particular comes to mind – Fundsmith Equity. 
Launched by city veteran Terry Smith in November 2010 on the basis of fixing the “broken” fund management industry by only buying top quality companies and holding them for the long-term, Fundsmith Equity has delivered superior performance relative to its peers and generated a huge following as a result.
According to FE Analytics, Fundsmith Equity has been the best performing portfolio in the competitive IA Global sector with returns of 197.04 per cent, therefore beating its MSCI World benchmark by 100 percentage points in the process.
What’s more, though, it has beaten both its sector and benchmark in every calendar since inception and is considerably outperforming once again in 2016 with gains of 28.05 per cent thanks to Smith’s focus on high quality growth stocks with reliable earnings and strong franchises.
Performance of fund versus sector and index since launch
Source: FE Analytics
Thanks to the nature of that outperformance, it is little surprise the fund has become a firm favourite with investors. Indeed, our data shows that with an AUM of £8.3bn, some 11.5 per cent of the total assets in the IA Global sector is in Fundsmith Equity.
However, while Fundsmith is clearly the go-to option for most investors wanting a global portfolio, a number of the sector’s younger offerings are building up strong track records. One that is deserving of attention, for instance, is FE Alpha Manager Ben Leyland’s JOHCM Global Opportunities fund.
Leyland initially worked on the popular JOHCM UK Opportunities fund with FE Alpha Manager John Wood and was given the opportunity to launch a fund using the same value-orientated strategy in the global space in June 2012.
Like Fundsmith Equity, the five crown-rated JOHCM fund (which is just £260m in size) has got off to a flying start – both in terms of total and risk-adjusted returns.
According to our data, Leyland’s fund has been a top decile performer in the peer group since its launch with a return of 105.37 per cent. While that means it is behind Fundsmith Equity, it has beaten its MSCI AC World benchmark some 30 percentage points over that time.
Performance of fund versus sector and index since launch
Source: FE Analytics
It too has outperformed in every calendar year since launch and is up against its benchmark and sector so far in 2016.
Leyland notes that the performance profile has come from his investment strategy, which he developed while working on the now £1.7bn JOHCM UK Opportunities fund with Wood. Therefore, while the fund itself hasn’t seen a variety of market conditions, Leyland’s own track record spans back to before the global financial crisis.
“The whole process is about identifying good companies and then only paying the right price for the shares. There is an element of quality and an element of value investing,” Leyland said.
“The quality element is based around traditional measures like high barriers to entry, pricing power and strong balance sheets because what you want in a business is, if things go wrong, they don’t go wrong that badly and therefore you don’t lose that much money. The tagline we always use is, ‘heads we win, tails we don’t lose too much’.”
“The way we think about value is absolute, not relative terms and with reference to the long-term cash generation of the business. We like companies re-investing now to grow in the future.”
It means, for example, that JOHCM Global Opportunities is unlikely to own the type of stocks found in a deep-value portfolio but is also unlikely to own very expensive names that, on the face of it, aren’t going to go bust.
“Quality investors emphasise finding the best companies but don’t think about how much they are paying for them and value investors emphasise buying the cheapest companies but they don’t think about what the tailrisks are – whether that’s structural risk or balance sheet leverage,” Leyland said.
“What this fund is trying to be, like JOHCM UK Opportunities, is a middle way between those two extremes.”
This focus on quality as well as value has led to a very different portfolio compared to the average IA Global fund.
For example, Leyland’s ‘watchlist’ of stocks reduces his investable universe to a few 100 companies and his final portfolio tends to be made up of less than 40 holdings.
He adds that while he and his team will always have a long list of businesses he wants to own, he will only buy those stocks within the fund when their shares trade at a level he deems to be attractive relative to the company’s intrinsic value.
If there are a lack of opportunities, rather than investing, he will let his cash weighting drift up until more value emerges. FE data shows Leyland’s strategy, in this regard, has worked well.
JOHCM Global Opps’s cash weighting versus performance of index
Source: FE Analytics
Over the past three years, Leyland has run an average cash weighting of 16.3 per cent. However, as the graph above shows, that allocation has tended to increase as the market has been rising and dropped quite dramatically after there is a fall in the index – again highlighting the fund’s value tilt.
For example, he used falls such as January’s China-induced sell-off to buy companies that were hit by the negative sentiment only due to their place of listing and bought a number of UK and pan-European multinationals that were hit prior to and after the Brexit vote, despite the fact most of their business is done in the US or emerging markets.
Now though, as he explained in a recent article, that weighting is up to 18.24 per cent thanks to the recent snap rally.
This focus on capital preservation means JOHCM Global Opportunities fund has – so far – been a good option for more cautious investors.
FE data shows the portfolio is firmly top-decile for its maximum drawdown, risk-adjusted returns (as measured by its Sharpe ratio), downside market capture and annualised volatility since inception. As a point of comparison, Fundsmith Equity (which is purely a high quality growth strategy) is the only global fund to have a better max drawdown, downside capture and Sharpe ratio over that time.
Like with the Fundsmith offering, JOHCM Global Opportunities’ performance has turned a number of heads. Not only has its AUM more than doubled over the past 12 months, it also has some notable backers like Schroders’ Marcus Brookes, who counts it in four of his funds of funds.
Leyland attributes the uptick in interest in his fund to the role he wants JOHCM Global Opps to play within an investor’s portfolio.
He says that most of his more recent clients are those faced with the unenviable task of deciding whether quality growth or value stocks will outperform from here.
“Volatility has picked up significantly over the past year. In more volatile environments, people are looking for equity managers who will manage the capital allocation for them,” Leyland said.
“Again, what we are trying to do is save people the hassle of making the hero call trade of selling the big quality stuff and buying the value stuff. We’ve seen year-to-date, people being made to look foolish by making those heroic trades at the wrong time.”
According to FE Analytics, funds that have a significant bias towards high-quality growth stocks (such as Fundsmith Equity) have tended to significantly outperform those with a value tilt over recent years.
Performance of indices over 3yrs
Source: FE Analytics
The reasons for this include the fact these stocks offer growth in a low growth world and that they have been the hunting ground of tourist fixed income investors who have been forced into equities by central banks in pursuit of yield and returns.
While some suggested that deep value stocks would come roaring back this year, a sense of nervousness among investors has curtailed such a suggestion so far in 2016.
Leyland added: “From a client’s perspective, selling a quality fund to buy a value fund is just too difficult so the interest in our fund is coming from the idea that we will make those allocation decisions responsibly throughout the cycle.”
Currently, JOHCM Global Opps is made up of 35 names with Leyland counting the likes of Oracle, Capita, Wolseley and Wolters-Kluwer as top 10 holdings. It has a clean ongoing charges figure of 0.87 per cent, but like all JOHCM funds, it charges a performance fee.
