Invesco Perpetual Global Opportunities, Orbis Global Equity and MI Metropolis Value are among the smaller funds in the IA Global sector to have generated the most alpha relative to the MSCI AC World index over the last five years, according to research from FE Trustnet.
This comes as part of an ongoing series, which focuses on the equity funds that boast strong active management skills but may be overshadowed by larger household names. Previous articles have taken a look at the IA UK All Companies and IA UK Equity Income sectors.
Now we have turned our hand to the IA Global sector, an area of the market where funds are notorious for underperforming the MSCI AC World index due to the sheer size of their investable universes as well as the index's significant weighting to efficient and expensive US stocks.
In order to find the best-performing funds that are also further down the size scale, we first filtered out the funds in the top two quartiles in the sector for their assets under management, as well as those which don't yet have a five-year track record.
From here, we focused on the funds that are in the top quartile for their five-year alpha generation (which measures returns in addition to the MSCI AC World) and total returns.
In our previous studies we have also filtered out those that are in the bottom two quartiles for their five-year maximum drawdowns but, in the case of the IA Global sector, this would have only left us with one relevant fund (the other two which passed through the filters - Schroder ISF Global Smaller Companies and McInroy & Wood Smaller Companies – can only invest further down the cap spectrum so it would be inaccurate to benchmark their alpha against a large-cap index).
The one fund that passed through all of our filters is the five crown-rated MI Metropolis Value, which is £99.2m in size and has a five-year alpha generation of 6.13. This means that if the MSCI AC World index is assumed to have returned absolutely nothing over this time frame, the fund would have returned 6.13 per cent.
The fund also has a maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 6.11 per cent compared to the index's drawdown of 10.95 per cent.
It has been headed up by co-managers Jonathan Mills and Simon Denison-Smith since its launch in 2011; both managers aim to provide long-term capital growth through bottom-up stock selection.
When choosing companies they deem to be undervalued by the broader market, the managers spend a significant amount of time analysing the bear cases that are deterring investors and whether this is simply the result of mass market sentiment or consensus trading.
Mills and Denison-Smith's process has clearly stood the fund in good stead as it has returned 112.44 per cent over five years compared to its MSCI World benchmark and peer average's respective returns of 104.14 and 85.65 per cent.
Performance of fund vs sector, benchmark and index over 5yrs
Source: FE Analytics
While this was the only fund to pass through all of our filters, a further four funds passed on all counts apart from their maximum drawdowns, all of which were in the third or fourth quartile (Guinness Global Money Managers was removed from the list because it only invests in asset management firms and is therefore unable to invest in a majority of the MSCI AC World index).
Out of these, the fund boasting the highest alpha generation over five years is Orbis Global Equity at 4.27. The £28.7m fund has four FE crowns and is managed using a team investment approach. Investors should note that, unlike all other funds in the sector, it does not have an ongoing charges figure but instead has a performance fee.
The fund, which has a five-year maximum drawdown of 14.48 per cent, aims to provide growth through a diversified portfolio of 82 stocks. That said, the team is unafraid to take punchy positions in stocks it has high conviction in; its largest individual weighting is to US transport services provider XPO Logistics at 5.7 per cent.
Over five years, the fund has outperformed its average peer and benchmark by 44.67 and 26.2 percentage points respectively with a total return of 130.32 per cent.
Next up for its alpha generation of 3.98 over five years is Aubrey Global Conviction, which has an AUM of £36m.
As its name suggests, the fund has a highly-concentrated portfolio which currently stands at 36 stocks. These are chosen based on a bottom-up stock selection process, which focuses on companies with high earnings growth potential and which are strong, stable and competitive businesses.
Because the fund's process is entirely bottom-up, its regional weightings look vastly different to the index. For example, its largest weighting (which is a significant underweight) is the US at 37 per cent, followed by Asia ex Japan at 32 per cent and continental Europe at 17 per cent. It also has very small weightings in emerging markets, Japan and Canada.
Over five years, the fund has returned 118.65 per cent, which is a comfortable outperformance of the sector average, its MSCI World benchmark and the MSCI AC World index. It has a maximum drawdown of 12.4 per cent over this time frame.
Performance of fund vs sector, benchmark and index over 5yrs
Source: FE Analytics
The only other two funds to have made it onto the list are Investec Global Special Situations, which is £41.7m in size; and Invesco Perpetual Global Opportunities, which has an AUM of £226m.
The former is headed up by Alessandro Dicorrado and Steve Woolley, although investors should note that both managers have only been at its helm since the start of last year following Alastair Mundy's decision to take a step back from the mandate in 2015.
As to be expected from an Investec fund, the managers adopt a deep value approach to stock selection which has led to a five-year alpha generation of 3.4 and a total return of 117.17 per cent over the same time frame. It also has one of the higher maximum drawdowns on the list at 13.15 per cent, suggesting it may not be best-suited to the more cautious investor.
Performance of fund vs sector, benchmark and index over 5yrs
Source: FE Analytics
The latter fund tops the table for its five-year maximum drawdown of 15.17 per cent, however. Invesco Perpetual Global Opportunities, which is managed by FE Alpha Manager Stephen Anness, is not benchmarked against an index and aims to achieve long-term capital growth. It does so through a concentrated portfolio of 41 stocks, with its top 10 largest individual weightings accounting for 42.56 per cent of the overall fund.
Invesco Perpetual Global Opportunities, which has a five-year alpha generation of 3.25, has returned 134.86 per cent over this time frame.