Out of 259 funds in the IA Global sector, only five of them have been deemed good investments to hold across our AFI (Adviser Fund Index) panel’s Cautious, Balanced and Aggressive portfolios, according to FE Analytics.
The IA Global sector has come under fire in the past for consistently underperforming its index - it has done so over one, three, five and 10 years, providing an average total return of 57.96 per cent compared to the MSCI AC World Index’s return of 81.28 per cent over the last decade.
Performance of indices over 10yrs
Source: FE Analytics
Nobody knows exactly why, but a potential reason for this includes the outperformance of the US market, which currently makes up more than 50 per cent of the index. This means that investors would have to take large bets on the US despite the common belief that market valuations there are stretched.
Other potential reasons include managers being too high-conviction with such a large pool to choose from, and managers’ tendency to be overweight Japan and Europe despite the fact the markets have underperformed.
This doesn’t mean that every global fund should be tarred with the same brush though. Delving under the bonnet of our AFI Panel’s model Cautious, Balanced and Aggressive portfolios, we take a look at the global funds that have been picked to feature in all three indices.
Managed by FE Alpha Manager Terry Smith since 2010, this five crown-rated fund is renowned for its concentrated portfolio of large and mega-caps with strong balance sheets and margins to match. Examples of stocks that sits in its top 10 holdings include Microsoft, Imperial Tobacco, Johnson & Johnson and Dr Pepper Snapple Group.
It is actually overweight the US compared to the MSCI AC World at 57.8 per cent, although the fund is underweight the US compared to its actual MSCI World benchmark, which has a 59.3 per cent weighting in the region. Concentrated in terms of region as well as holdings (it currently consists of 27 stocks), the fund also has a 24.8 per cent weighting in the UK, 12 per cent in Europe and holds 5.4 per cent in cash.
Over Smith’s tenure, the £5.5bn fund has provided a total return of 140.38 per cent, outperforming its sector average and benchmark by 95.63 and 70.69 percentage points respectively.
Performance of fund vs sector and benchmark under Smith
Source: FE Analytics
Opting for large stocks at the lower end of the risk scale, Smith aims looks for companies that are trading at either a small discount or at fair value and holding them over the long term.
Over the last five years, the fund has a top-decile risk-adjusted return (as measured by its Sharpe ratio), annualised volatility and maximum drawdown, which measures the most potential money lost if bought and sold at the worst possible times.
Fundsmith Equity has a clean ongoing charges figure (OCF) of 0.97 per cent.
The second fund on the list is Stuart Rhodes’ M&G Global Dividend fund, which resides in the global growth sector despite its name for being under the Investment Association’s yield requirement of 4 per cent.
That said, the fund still has a yield of 3.31 per cent with an aim of providing a greater dividend than its benchmark (which is around 2.7 per cent) and has outperformed its sector average over five years by 213 basis points with a total return of 35.44 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Almost two-thirds of the £5.7bn fund is in US stocks – it also has small weightings in the UK, Asia Pacific and Europe.
Rhodes looks for stocks that are able to provide consistent dividend growth regardless of market conditions – its holdings include the likes of British American Tobacco and Blackrock - and invests across three buckets. The largest of these is quality, which usually makes up more than half of the portfolio, followed by cyclical growth and high growth.
In terms of risk metrics, it is in the third quartile for its annualised volatility, risk-adjusted returns and maximum drawdown, which suggests the fund may not be suited to highly cautious investors.
The fund has a clean OCF of 0.91 per cent.
MI Thornbridge Global Opportunities
This much smaller fund is just £57.1m in size and has been headed up by Anthony Eaton for more than a decade.
While it has delivered a return less than half that of its peers and even less than its benchmark over three and five years, it has delivered a strong performance over the long term with a total return of 76.48 per cent over the last decade compared to its composite’s return of 57.96 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Its recent underperformance could be a result of its style falling out of fashion for the time being – especially as Eaton tends to favour global basics-type stocks – as investors have become increasingly cautious and gravitated towards funds with more of a quality bias.
At the moment, the manager is seeing opportunities in the oil, mining and agriculture sectors because material prices are “bouncing around” rather than falling.
“These new positions are more of a hedge against missing any turn in sentiment than strong conviction at this stage but there are sufficient signals about to be interesting and we anticipate more engagement,” Eaton explained in his commentary earlier this year.
As to be expected, this has led to him taking up some positions in emerging markets. Indian oil and gas firm Aegis Logistics, for instance, is the fund’s fourth-largest holding at 1.15 per cent. This stock is one of just 11 in the portfolio that have a weighting of more than 1 per cent, as the fund currently holds a total of 192 companies.
MI Thornbridge Global Opportunities has a clean OCF of 1.72 per cent.
Standard Life Investments Global Equity Unconstrained
Next on the list to be featured across all three AFI risk-adjusted portfolios is Mikhail Zrerev’s four crown-rated SLI Global Equity Unconstrained fund, which is £207m in size.
The fund uses the ‘Focus on Change’ approach which is adopted by all equity managers at Standard Life and involves a bottom-up, style-agnostic attitude to stock selection.
The manager looks to seek out any positive changes being taken on by companies that haven’t yet been priced into the market – examples of the fund’s top 10 holdings include Kraft Heinz, Glambia and Ryanair.
As such, the fund is in the bottom quartile for its annual volatility and for its downside risk, which measures its estimated potential to decline in price, over five years. However, it has provided a total return of 96.01 per cent since Zrerev took to the helm in 2010, outperforming its average peer by 34.86 percentage points.
Performance of funs vs sector and benchmark under Zrerev
Source: FE Analytics
The fund has a clean OCF of 1.02 per cent.
Vanguard FTSE Developed World ex UK Equity Index
The final fund to be featured across all three portfolios is a tracker – the Vanguard FTSE Developed World ex UK Equity Index fund – which was launched in 2009 and has a very low tracking error ratio of just 0.08 per cent over this time frame.
Over five years, the fund has provided a total return of 59.03 per cent, which is just 4 percentage points less than its benchmark. The strong performance of the FTSE Developed World ex UK Equity index means the fund comfortably sits in the top quartile over this time frame as well as over three years.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The £2.2bn fund is recommended by the Square Mile research team as it believes that Vanguard has a very strong commitment towards managing passive strategies.
“Our rating on this fund is based upon our opinion of the suitability of the index tracked, the management group's commitment to operating passive strategies, the size of the fund, the fund's cost and good historic record of tracking the index,” it said.
Vanguard FTSE Developed World ex UK Equity Index has a clean OCF of 0.15 per cent.
