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Do global funds deserve to have a place in your portfolio?

18 October 2016

FE Trustnet asks the experts what the pros and cons of a global fund are and whether they have a place in a balanced portfolio despite years of underperformance.

By Jonathan Jones,

Reporter, FE Trustnet

Global funds have a mixed reputation with the average active fund underperforming the MSCI World over the past decade, but commentators remain mixed on whether investors should keep the faith. 

There are many reasons for this underperformance, including an underweight position in the US, which has continued to perform strongly over the last decade, as well as a home bias to the disappointing FTSE 100 and an overweight cash position, likely to be held in sterling.

Indeed, as the below graph shows, the average global fund has underperformed the MSCI World index by 31.94 percentage points over the last 10 years.

Performance of indices over 10 years

 

Source: FE Analytics

Having previously explored the reasons for this underperformance in an article on FE Trustnet last week, we ask the experts if it worth owning a global fund or just blending a range of regional offerings.

 

The case for global funds

Colin McQueen, co-manager of the Sanlam FOUR Global Equity and Stable Global Equity funds, says the world has become more international, with companies and investors now looking globally more than ever.

“The days when [you could say] ‘BMW behaves like a German company’ are sort of gone. BMW behaves like a car company,” he said.

“If you add together a whole lot of regional funds you’re going to get a whole lot of bunch of almost semi-random exposures to different industries over time.

“With a global fund you have the opportunity to say ‘well actually let me find the best oil company in the world and buy that one, let me find the best car company and buy that one, let me find the best drug company’ and let the geographic mix of where they happen to be listed fall out.”

“Roughly, what a company does has twice the influence on its stock price as to where it’s listed,” he added.

As a result, McQueen says he would be unable to fit his investment criteria - to make positive real returns over the long term by investing in companies with high returns on equity and that are consistent - if the fund were not global.

“From our fund specifically, we don’t think we could do what we want to do in a UK context, we almost have to do it in a global context because if you think about the specifics of the sort of companies we’re looking for – these very high ROE and consistent companies – typically they’ll make up around 20 per cent of any given stock market by market value,” he said.

“If we were to do it in the UK we would probably struggle to find 25 stocks to fit the bill and we’d be a bit stuck because we’ve got a choice of one consumer company, two tobacco companies whereas globally there’s the whole competitive universe to choose from.

“You have to do it globally or you lose any ability to select between companies.”


The Stable Global Equity fund, which is a concentrated portfolio of 26 stocks, has been a top quartile performer since launch, returning 31.70 per cent to investors, as the below graph shows.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

However, McQueen’s Global Equity fund has struggled of late, returning 12.45 per cent over the same timeframe and has been a bottom quartile performer every year since its top quartile performance in 2013.

 

The case against global funds

Premier Asset Management’s Simon Evan-Cook says he invests in regional rather than global equity funds, as it allows him to take control and move to areas of the market he believes will rally.

He said: “It gives us extra flexibility to asset allocate ourselves, so to move away from or towards regions when we think valuations suit.”

However, he adds that there are concerns over whether the world is simply too big a place for one team to cover and focus on sufficiently to make decisions.

“For us having a manager focused on one market gives them the ability to understand those markets in better depth, understand the stocks in better depth, so I think there’s an edge to be had from having a selection of regional investors over a global investor.”

When it comes to the average global fund, he says that he is very wary of those with “tricky benchmarks” and says global managers can be psychologically impacted by the performance of a certain region.

In regards to the large weighting of US equities to the MSCI World, he said: “As soon as you have that it starts to play on managers’ minds that you’ve got such a large weighting in that equity market - it becomes very difficult to ignore.

“So you might end up owning more US equities than you might have done otherwise because it’s such a large part of your benchmark.

“Alternatively you might find it hard to overweight that because it just feels difficult to put maybe 65 to 70 per cent of your global equity portfolio into US equities when the world is a very big place and there are so many opportunities outside of it.

“So it has psychological impacts having a large constituency of any benchmark which can cause havoc for managers and I suspect that has been a part of the sector’s woes.”


 

The case for balance between global and regional funds

Overall, Daniel Adams, senior investment manager at Psigma, says global funds should be used in conjunction with regional funds.

“In terms of how we allocate, we would take a holistic approach so we would look at regionally as well as the opportunities globally,” he said.

One of the main attractions to global funds, he says, is it allows investors to capitalise on volatile markets and currencies without putting too much exposure on one region.

“As we’re going through markets at the moment which have so much volatility between currencies but also between specific equity markets it becomes harder to allocate on a regional basis. So outsourcing to someone who can do the whole lot makes sense.”

The two global funds Psigma owns are the five crown-rated R&M World Recovery fund run by Hugh Sergeant and Artemis Global Income run by Jacob de Tusch-Lec.

“One fund we have is the R&M World Recovery fund. That’s very much benchmark agnostic, the benchmark is 50 per cent US whereas that fund is 40 per cent Europe and only 10 per cent US with the rest in the emerging markets and Asia,” he said.

“That’s really driven by the value areas of the market so it’s a lot more volatile but very much away from the benchmark.”

Artemis Global Income again has a slight value bias, he says, with about 30 per cent and 35 per cent invested in developed Europe.

As the below graph shows, the £200m R&M World Recovery fund has beaten the IA Global sector and MSCI AC World benchmark by 32.96 and 23.35 percentage points respectively since launch in March 2013, despite global value long underperforming growth strategies.

Performance of funds vs indices since R&M launch

 

Source: FE Analytics

Meanwhile, the £3.1bn Artemis Global Income has beaten the IA Global Equity Income sector and MSCI AC World benchmark by 19.23 and 6.32 percentage points respectively over the same time frame.

However, Adams reiterates that “we balance that with regional specific funds,” in order to maintain a balanced portfolio.

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