Having a mixture of funds that are set up to do well in different environments is essential to diversify the risk in your portfolio.
And if you are saving regularly through an ISA or a pension, you will limit the losses you can make on the downside while gathering money in the assets for its eventual uptick – assuming it comes, of course.
Certainly investors in M&G Global Basics may be feeling their patience fraying about now.
Data from FE Analytics shows it has been a bottom-quartile performer in the IMA Global sector for the past three calendar years – 2011, 2012 and 2013 so far.
This means it now sits in the bottom quartile over three and five years, with returns of just 11.49 per cent and 35.2 per cent respectively.
The fund has made half the IMA Global sector's returns of 30.3 per cent over three years and has also underperformed its composite benchmark.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
However, looking a little deeper at its track record and composition, it is clear there are good reasons for this apparent underperformance and that there may be light at the end of the tunnel for investors.
The £4.5bn M&G Global Basics fund is run by FE Alpha Manager Graham French with a distinctive aim and style. French invests in companies in the primary and secondary industries, defining those as the producers and extractors of raw materials and the companies that turn them into consumer products.
The idea is to catch on to long-term economic trends and make money from investing in the "building blocks" of the world economy.
The fund has 22.9 per cent in the basic materials sector, more than double that of its benchmark, and is also heavily weighted to basic consumer goods.
Its top holding is food flavourings maker Symrise, a German-headquartered multinational, to which 8.7 per cent of the fund is allocated.
French has 5.1 per cent in French advertising company Publicis Groupe, which recently merged with US Omnicom to create the world’s largest advertising conglomerate.
Both companies draw strongly on growth in emerging markets for their profits, which begins to explain M&G Global Basics’ recent underperformance.
The company’s most recent results show that its sales are growing faster in emerging markets than in the developed world.
It is aiming to increase its market share in the emerging world and sales in that sector rose to 48 per cent of the total.
Publicis Groupe has been increasing its acquisitions in emerging markets over the past few years, with revenue growth substantially exceeding that in the developed world in the company’s last annual accounts.
Indeed, analysts suggest that part of the reason for the tie-up with Omnicom is to maximise the group’s potential in emerging markets.
In short, this is a fund positioned much more for growth in emerging markets than the developed world, but it has been the latter that has outperformed over the past three years.
In 2009 and 2010, the last years the FTSE All World Emerging index outperformed the FTSE All World Developed index, M&G Global Basics did very well, recording top-quartile returns in the IMA Global sector. The year 2012 did not fit this pattern, however.
Performance of fund vs indices since 2009
| Name | 2013 | 2012 | 2011 | 2010 | 2009 |
|---|---|---|---|---|---|
| M&G - Global Basics | 7.36 | 1 | -12.34 | 27.68 | 35.31 |
| FTSE All-Wld Emerging | -4.44 | 11.67 | -20.85 | 21.27 | 57.55 |
| FTSE All-Wld Developed |
17.32 | 8.93 | -7.36 | 12.95 | 13.13 |
Source: FE Analytics
The fund’s performance seems worse than it is as it is surrounded by funds that have gone into stocks playing the performance of the US, Europe and the UK in particular, domestic-facing stocks that were de-rated following the financial crisis.
That is not to say it is necessarily a better bet that an emerging markets fund.
The vast majority of the fund’s stocks are domiciled in the developed world, spread across the US, UK and Europe.
In fact it is seriously underweight the US in terms of where companies are located, with only 18.1 per cent in the country compared with the 40.8 per cent of its peer group average.
The fund has 15.2 per cent in UK-domiciled companies, 13.2 per cent in Australia and a little over 10 per cent in each of France and Germany.
The largest direct emerging market holding is AMMB, otherwise known as AmBank, the fifth-largest bank in Malaysia.
This means that it is hard to select a peer group to compare it against, and harsh to criticise it simply on the grounds of relative underperformance to either sector.
The fact remains that it is much more of an emerging markets play and is likely to do better when or if this sector starts to outperform again.
However, the developed world listings may have helped it do better than straight emerging market funds judging by its recent outperformance of emerging markets portfolios.
Performance of fund vs emerging markets sector over 3yrs
Source: FE Analytics
Investors may have been bailing out of emerging markets in recent months off the back of three years of underperformance – but this is likely to be a bad time to sell.
However, the reaction to the Fed’s decision last night not to reduce its QE programme just yet shows how important it is not to put all your eggs in one basket.
The recent weakness in emerging markets has been largely caused by expectations of a reduction in QE and therefore fund flows into the emerging markets along with the strengthening of the dollar relative to emerging market currencies.
However, overnight, in a decision that surprised many, the course was set away from that environment back into a more conducive situation for the developing world, and emerging markets shot up in response.
Many investors had started to take it for granted that the near future would proceed in a certain fashion.
It underlines the point that investors really need to balance their portfolios for all eventualities to avoid being exposed to such shocks.
Underperforming against a benchmark my seem a more objective measure to judge the fund by than a sector, particularly when the benchmark is chosen by the manager.
However, there are questions to be raised here, too. M&G Global Basics' benchmark is made from the FTSE World sector indices excluding the media, IT, telecoms, financials and healthcare sectors.
The FTSE World sectors are heavily weighted towards the developed world, where most of the world’s market capitalisation of companies is listed. It is understandable that a fund which is exposed to emerging market growth might underperform these indices.
The rationale for investing in emerging markets is that they will outperform the developed world over the longer term, and the past three years are too short to say whether this judgment is wrong.
In fact, the exclusions from the indices give investors another reason to look again at this fund.
Financials and healthcare have been some of the best-performing in recent years, and technology has done very well.
The first two in particular have been popular among fund managers in recent months and investors are likely to have large holdings there in equity funds that might be nominally UK, US or emerging market funds.
The performance of M&G Global Basics certainly looks bad in relative terms on the headline numbers, but digging a little deeper it is clear there are reasons for this that flow from its well-defined strategy.
Ditching it from your portfolio could be a mistake if the market turns to its advantage, as it has done before.
