When it comes to buying into the stock market, investors face two main options: picking a global fund which can come with underlying biases and overexposure to different regions, or choosing their own regional weightings and building their own portfolio accordingly.
Both come with their own positives and negatives.
Investing in a global fund often means that investors have to accept the predetermined regional weightings, which can have biases whether they are actively or passively run.
Taking the MSCI ACWI index as an example, it has almost 60% in North America with second-biggest regional allocation (Japan) at 6.2%. This is followed by China at 4.1% and the UK at 3.7%. The remainder is in ‘Other’.
Many global funds follow the benchmarks’ lead on this, exposing a large part of the portfolio to the US. This general overweight is mainly because the North American market has generated such high returns in recent years, forcing global indices weightings to the region higher.
This is not necessarily a bad thing but not all investors may want such a high US exposure. They might consider building their own global fund through a number of regional holdings, deciding the regional weighting for themselves.
This is not the way to go though for Craig Baker, chair of the Alliance Trust Investment Committee, nor are trackers ideal for global exposure.
Essentially, Baker said it is very difficult to construct your own equity portfolio from a series of regional building blocks.
First, you have to choose which regions you want to allocate to, which involves in-depth knowledge of the relative market and its prospects. Then you have to pick the funds and managers you want to hold for each region, monitoring them over time and rebalancing and replacing where appropriate.
“That’s no easy task for professionals, not to mention DIY investors with day jobs,” he said.
Colin Low, chartered financial planner at Kingsfleet Wealth, echoed this, adding “we don't believe that we have the skill set to determine if companies in Asia will outperform those in Europe or whether those of China will deliver stronger returns than those in North America, so we think there are more skilled and knowledgeable people than us who can make those decisions.”
Another negative for DIY regional exposure is it could also limit asset classes exposure, which Alex Crooke, manager of the Bankers Investment Trust, said was a crucial form of diversification.
He said that the same way as investing in a single stock is problematic “because intense concentration of that kind leaves no margin for error,” so is investing too much in one asset class.
Different areas of the market favour different assets, the US is synonymous with growth and tech while the UK is known for its commodities companies. If an investor was not aware of this bias, and invested in several markets centred on the same asset class, it could create further risks.
Low pointed out that today many companies make profits globally so it is “fruitless to divide up the planet based on the location of a listing when so much trade happens across borders”.
“We always have to remember that investing is about seeking return on capital. We would much rather utilise managers who are able to determine this at a global level – to invest in the best companies whatever their sector may be and wherever they are listed,” he said.
If an investor were to take the global route, however, a tracker fund is not the optimum way to do it.
Baker said that a benchmark weighting can be a good place to start for portfolio construction as it represents the “current opportunity set”, as is the case with the high US allocation “given its economic dynamism”.
“That doesn’t mean, however, that you should just buy a global index fund,” he said.
Going via a tracker would mean investors lose out on the skills and advantages of good global managers, and take on most regional biases.
He said it is better to pick several highly skilled stock pickers with complimentary styles “and give them the freedom to pick the best companies in the world, as opposed to restricting them to regional buckets where they might end up owning the second or third best companies in a global industry”.
Adrian Lowcock, independent advisor, agreed that the global route was more advisable but noted that once investors have had some time to study the market and gained experience, they can start adding satellite funds to their portfolio to help shift their weightings.
For the global fund, he said that investors should avoid the ‘one-stop shops’ that offer a particular investment style or philosophy and therefore not a diversified exposure to the whole market.
This can then be supplemented. For example, Richard Colwell’s Threadneedle UK Equity Income could be an ideal satellite holding, Lowcock said, investing in both growth and value stocks wherever the manager sees opportunities.
“For exposure to bonds I would pick the M&G Global Macro bond fund as manager Jim Leaviss will use his detailed knowledge of the market and economics to target a total return in bonds,” Lowcock said.
He added that investors should also consider adding some Asia exposure given many global funds have low allocation to this region.