However, over the last five years, investors would have been better off in a UK fund, according to FE Trustnet research.
The IMA UK All Companies sector made an average of 33.67 per cent over the last five years, while the IMA Global sector trailed its UK peers at 30.71 per cent, at a shockingly high correlation of 0.96 – nearly perfectly correlated.
Performance of sectors over 5 yrs
Source: FE Analytics
Thames River’s Gary Potter (pictured) says while the UK economic situation looks bleak, the majority of earnings from FTSE 100 companies are derived from outside the UK, making it a truly global index.
“Investing in the UK is not investing in the UK economy,” he said. “They have a global reach and are not really affected by what’s going on in the UK. Mainstream [funds] participate significantly in developing economies and markets and not just in the UK.” However, the manager stresses the market cap of UK funds was key, and that investing in small to mid-cap funds meant keeping exposure closer to home, while large-cap funds invested in the likes of HSBC, Vodafone and Royal Dutch Shell would inevitably have a global bent.
Potter says that global funds have their place in portfolios, but there is a strong case for "cherry-picking" managers in the UK.
Rather than exposing themselves to the risks of certain emerging economies and tumultuous developed markets like Japan, investors can gain global exposure through funds like the five-crown rated JOHCM UK Opportunities or £832.2m Jupiter UK Growth funds.
While both portfolios are made up of UK-listed companies, the managers intentionally look for companies which derive a portion of their return from outside the UK.
The FE Research team says FE Alpha Manager John Wood’s outperforming portfolio in particular is a strong choice for global exposure.
“The fund invests in equities listed on the UK stock market, yet despite its name it favours companies that derive the majority of their earnings from overseas,” said FE Research analyst Amandine Thierree.
“To build the portfolio, manager John Wood and his team identify ‘long-term global tailwinds’, or economic developments that support sustainable growth, before searching the entire UK stock market for businesses that will benefit from these trends.”
Performance of funds over 5 yrs
Source: FE Analytics
Both funds have strongly outperformed both indices over three and five years, with the JOHCM fund returning 46.78 per cent and the Jupiter portfolio gaining 38.54 per cent over 5 years, according to FE Analytics.
Correlation to North America
The difference is even more pronounced when looking at US funds.
Over the last five years, North American funds have eclipsed both UK and global portfolios – returning 54.85 per cent. The Global sector is still highly correlated to North American funds – at 0.93 – but the US and UK sectors are less correlated to each other – at 0.84.
Performance of sectors over 5 yrs
Source: FE Analytics
The best-performing North American portfolio over the last five years is the five crown rated GAM North American Growth portfolio headed up by FE Alpha Manager Gordon Grender.
The fund has made 103.01 per cent, while the next closest fund – the Schroder Global Healthcare fund, which sits in the Global sector – made 99.38 per cent. However, the Healthcare fund is a specialist product that is not likely to be a wider global holding for an investor.
Over three years, North American funds have smashed their global rivals. Six of the top-10 performers over the period are US funds, with the tiny CF Greenwich and GAM funds leading the pack.
Tony Yousefian (pictured), chief investment officer at OPM Fund Management, says the improving economic climate in the US has buoyed North American funds, a process he expects to continue.
“North America has done extremely well compared with global funds,” he said. “The economy has begun to perform once again and the stock market is beginning to reflect that economic recovery. That’s something that has happened over the last 12 to 18 months.”
“Companies in the US are very dynamic and just because they are listed in the US doesn’t mean their business is purely in the US,” he said.
Yousefian says investors could easily create a portfolio of US-listed companies that would in fact have wide global exposure and would benefit from the added security of a likely strong recovery in the country and the absence of corporate governance issues that can plague other fast-growing regions like emerging markets.
However, he says global funds still have a place in investors’ portfolios, particularly for those with smaller amounts to invest.
“You’re not quite looking at like for like,” he said. “North American funds are a good building block for any portfolio, but global funds can give you exposure elsewhere.”