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These global funds have beaten the MSCI World at least 80% of the time

FE Trustnet looks at the funds with longer-term track records that have outperformed the global equity index for most of the past decade.

Jonathan Jones

By Jonathan Jones, Reporter, FE Trustnet
Thursday February 16, 2017

Only four of the 230 UK equity funds with track records of more than five years have outperformed the MSCI World index in 80 per cent or more over the past 10 calendar years, according to data from FE Analytics.

As found in a previous study, the IA Global sector was the most difficult for active managers to outperform, with the sector being the worst for alpha generation in the last decade.

It is unsurprising therefore that the average fund in the IA Global sector has underperformed the MSCI World by 38.35 percentage points over the last decade.

Performance of index vs sector average over 10yrs to 31 December 2016

 

Source: FE Analytics

Many experts attribute this to a general underweight position in US equities, which have continued to be the strongest performing market globally, and an overweight position in the UK, which has been one of the weakest.

Previously, Rob Morgan, pensions and investment analyst at Charles Stanley Direct, said: “I think with global, a number of active managers have been underweight the US on the grounds it is a more expensive market, but nonetheless it has outperformed.”

Meanwhile, Martin Bamford, chartered financial planner and chartered wealth manager at Informed Choice, added that “when faced with a massive amount of choice, often accompanied by insufficient research across all stocks, active managers tend towards hugging the index and little opportunity for outperformance is available”.

Having previously explored the UK sectors, below FE Trustnet looks at the funds in the global sectors that have outperformed the MSCI World 80 per cent or more of the time over the last decade.

For this study we have looked at calendar years only and have eliminated funds that have a track record of less than five years.

This left us with four funds although the fourth - Fidelity Global Consumer Industries – is a sector-focused fund which is uncorrelated to the MSCI World and therefore unfair for comparison purposes.


The only fund to have experienced the full 10-year cycle is Invesco Perpetual Global ex UK Enhanced Index, which aims to outperform the MSCI World ex UK over a full market cycle – typically between five and 10 years.

As the UK has been among the worst performing sector over the past decade, it has received an immediate boost from a lack of exposure to the market.

Indeed, in a previous article, Premier Asset Management’s Simon Evan-Cook said that global funds have been too correlated to UK equities.

“I would put a large part of the blame of that underperformance on the doorstep of UK equity exposure,” he said.

However, this is not something that the four crown-rated Invesco Perpetual Global ex UK Enhanced Index has struggled with.

In its factsheet, Invesco Perpetual describes the £418m fund run by Alexander Uhlmann and Michael Fraikin as one that “follows a systematic investment process, with a high correlation to the index”.

“The fund uses a range of factors to evaluate the relative attractiveness of a stock together with an assessment of risk, to build a portfolio that shares the broad characteristics of the index.”

Performance of fund vs benchmark and MSCI World over 10yrs to 31 December 2016

 

Source: FE Analytics

Over the period, the fund has returned 148.41 per cent to investors, narrowly beating its MSCI World ex UK index and the broader MSCI World.

The fund also benefits from being one of the few to be overweight US stocks, with 66 per cent allocated to the asset class against the MSCI World’s 54 per cent weighting.


However, two funds were able to outperform 83 per cent of the time (or five out of six years), including the five crown-rated Fundsmith Equity, run by FE Alpha Manager Terry Smith

The £9.3bn fund outperformed the MSCI World in each of its first five years with 2016 being the first it failed to achieve this, though it was behind by a smaller margin (8 basis points).

Smith (pictured) is known for his bottom-up, quality growth, long-term approach and despite the potential return of the value investing style, the manager said he would be sticking to his investment philosophy.

He said: “I have no way of knowing whether this ’rotation’ will continue but then again neither do any of the analysts or commentators who are involved in opining on the matter.”

Indeed, in a previous article, Adrian Lowcock, investment director at Architas, recently noted that fund managers with a specific style bias such as Terry Smith will naturally go through peaks and troughs.

“Even Terry Smith has been fairly surprised with the strength of performance up until 2016 and any fund that has a particular style bias will have periods where it underperforms the benchmark,” he said.

However, Smith’s style has worked incredibly well since inception, as the 9.27bn fund has outperformed the MSCI World by 85.34 percentage points from its launch to the end of 2016.

Performance of fund vs MSCI World over 10yrs from launch to 31 December 2016

 

Source: FE Analytics

Its biggest single calendar year of outperformance came in 2011 when the fund beat the MSCI World by 13.2 per cent, though it has beaten the index by more than double digit percentage points in three of the last six years.

The concentrated, long-term focused portfolio is 64 per cent weighted to US equities but is also 19.5 per cent exposed to UK equities – 10 and 12.5 percentage points overweight compared to the MSCI World respectively.


The other fund with similar outperformance of the index is the £3.4bn Artemis Global Equity Income fund, run by Jacob de Tusch-Lec. It aims to provide a rising income and capital growth from global equities.

The fund outperformed in each of its first five years but was unable to beat the MSCI World index last year, falling short by 5.75 percentage points.

Overall, however the fund has outperformed since launch by 32.45 per cent with its largest year of outperformance coming in 2013 (9.41 percentage points ahead of the MSCI World).

Performance of fund vs MSCI World over 10yrs from launch to 31 December 2016

 

Source: FE Analytics

In its latest factsheet, Square Mile Research said: “This strategy differentiates itself versus many of its peers both by steering away from the more traditional income stalwarts and by combining stock selection with a consideration of the macro backdrop.

“The manager ultimately looks to provide a blend of companies with different characteristics whose fortunes do not rise and fall together, as may be the case with a portfolio made up of purely high yielding blue-chip names.

“This fund offers good diversification benefits and it has been designed to complement more core strategies.”

The fund currently has a more value-biased approach and is overweight financials and cyclical stocks as the manager says “we have now shifted from a deflationary environment to a reflationary environment”.

“For now, while we are wary of complacency, it seems likely that banks and cyclical stocks will continue to perform well. We remain overweight in these areas of the market and underweight in consumer staples and bond proxies,” de Tusch-Lec said.


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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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