There are six funds in the IA Global sector with the maximum Crown Rating of five, an Alpha Manager at the helm and a low correlation to at least one peer rated just as highly.
When we ran this study for other sectors, we had to relax the criteria – for IA UK Smaller Companies, for example, we also included funds with a Crown Rating of four and removed the requirement for an Alpha Manager – yet there were still only three funds that had a correlation of 0.7 or less (where 1 = a perfect correlation and 0 = no correlation) with one of their highly rated peers.
Correlation of top-rated funds
Source: FE Analytics
However, the breadth of stocks available to IA Global managers meant that even with the more stringent rules, six funds still made the list.
Baillie Gifford Long Term Global Growth
Top of the list was Baillie Gifford Long Term Global Growth, which had a low correlation to four of the other five funds on the list.
The fund is headed up by Tom Slater, who also runs the top-performing Scottish Mortgage Investment Trust, and Mark Urquhart.
The managers aim to beat the FTSE All World index by at least 2.5% percentage points per annum over rolling five-year periods, by investing in what they called “exceptional growth companies”.
“We believe that investing in companies with the scope to grow to multiples of their current size over the next decade has the potential to transform the returns achieved for investors over time,” they said.
“Portfolio holding sizes are based purely on our view of the magnitude of the potential upside and our associated level of conviction. The turnover in the portfolio is low, reflecting our long-term perspective and resistance to trading on short-term newsflow.”
Baillie Gifford Long Term Global Growth has made 242.1% since launch in April 2017, compared with 61% from the IA Global sector and 59.8% from the FTSE All World index.
Performance of fund vs sector and index since launch
Source: FE Analytics
It made 95.6% last year, but the managers warned this was partly due to unusual market conditions caused by the coronavirus pandemic. This benefited a number of holdings which saw faster-than-expected growth as a result of the early adoption of technologies and services.
“That rate of growth is unlikely to be repeated in normal market conditions,” they warned.
Baillie Gifford Global Discovery
Baillie Gifford Global Discovery invests in smaller companies, but manager Douglas Brodie said it is not a typical small-cap fund: he looks for what he referred to as “innovative, immature companies with excellent long-term growth potential”.
“By identifying attractive growth companies earlier, we seek to benefit from growth at an earlier stage in a company’s lifecycle and retain ownership of successful companies as they grow and thrive,” he said.
However, he warned that while this approach can deliver excellent long-term returns, investors should consider their tolerance for volatility before buying in.
Baillie Gifford Global Discovery has made 164% over the past five years, compared with 81.1% from the MSCI AC World index and 78.9% from its IA Global sector.
Fundsmith Equity
Fundsmith Equity’s manager Terry Smith summed up his process as “buy good companies, don’t overpay, do nothing”.
By good companies, Smith means those with enduring profitability, attractive free cash-flow yields and low levels of operational and financial leverage. These will have some kind of intangible asset such as brand name, patent, licence or distribution network.
He avoids cyclical companies in sectors such as banks, airlines and commodities.
The fund is now £27bn in size, however, and although Square Mile Investment Consulting & Research said that the growth in assets has not been an impediment to the investment process as yet, it was something to remain conscious of.
Performance of funds vs sector and index over 5yrs
Source: FE Analytics
Fundsmith Equity has made 114.7% over the past five years.
Fundsmith Sustainable Equity
Like Fundsmith Equity, Fundsmith Sustainable Equity is also run by Terry Smith, with the same focus on buying quality companies and holding them for the long term.
However, it also avoids the following sectors: aerospace and defence; oil, gas and consumable fuels; brewers, distillers and vintners; metals and mining; casinos and gaming; pornography; gas and electric utilities; and tobacco.
In addition, Smith applies further criteria to screen investments in accordance with the fund’s sustainable investment policy. It considers companies’ handling of environmental, social and governance issues, as well as their policies and practices on research and development, new product innovation, dividend policy and the adequacy of capital investment.
Performance of fund vs sector and index since launch
Source: FE Analytics
Fundsmith Sustainable Equity has made 71.1% since launch in November 2017, compared with gains of 52% from both the MSCI World index and IA Global sector.
Nomura American Century Concentrated Global Growth Equity
Rather than focusing on earnings growth, the team behind the Nomura American Century Concentrated Global Growth Equity fund pays more attention to earnings acceleration.
“What we find is that very few investors focus on earnings acceleration as the starting point of the research process,” said Richard Adams, senior investment director at American Century Investments. “It's normally just a characteristic that's nice to see.”
Some investors may be surprised to hear tech companies do not score particularly well on this metric. However, Adams pointed out that many of the mega caps have already attained high growth rates, and the prospect of accelerating from this point is limited.
As powerful as earnings acceleration is, Adams said it is also necessary to incorporate real-word considerations into the stockpicking process. As a result, the team behind Nomura American Century Concentrated Global Growth Equity also looks at the sustainability of the earnings acceleration, the difference between the estimate of a company’s earnings and the market’s, and valuation.
Nomura American Century Concentrated Global Growth Equity has made 141% over the past five years.
Stonehage Fleming Global Best Ideas Equity
Gerrit Smit, the manager of Stonehage Fleming Global Best Ideas Equity, aims to invest in attractively valued quality companies with a competitive edge.
To find these companies, he looks for four “pillars”: sustainable organic growth, a good management and culture, high returns on capital and strong free cash-flow generation.
The manager has delivered consistent outperformance on his fund, yet he recently told Trustnet that this does not mean quality growth is an inherently “safe” strategy.
“I'm not naïve enough to think that growth is less at threat than value,” he said.
“But on the condition that you do your research to identify sustainability, on balance you've got a better chance for a respectable return than trying to read short-term cycles and ride the value opportunities.
“You make many more decisions [with a value approach] with a much better chance of having some of them go wrong than you do in a growth buy-to-hold strategy.”
Data from FE Analytics shows Stonehage Fleming Global Best Ideas Equity has made 104.1% over the past five years.