Global equity funds have been the main destination for investor cash of late, but FE data suggests that very few members of the sector have consistently displayed outstanding skill at active management.
In a recent article, FE Trustnet used the information ratio – which is as an expression of the success of a manager’s active decisions away from the benchmark for each unit of extra active risk taken on – identify funds in the IA UK All Companies sector where their success is down to skill on the manager’s part.
We now turn to the IA Global sector, reviewing the five-year information ratio of all funds with a track record going back to at least the start of 2007 and an r-squared ratio to the MSCI AC World index of at least 0.6 (to make sure the results are statistically significant).
Rather than just consider the most recent five-year period, we used rolling five-year periods going back to the start of 2000 (or the funds’ full history, if shorter) to find the average information ratio and ensure any strong performance persisted over the long term. It must be noted that this is a very tough set of criteria.
Rolling five-year information ratios of Orbis Global Equity and IA Global sector
Source: FE Analytics
The higher the information ratio, the better; analysts in FE Invest consider a figure of 0.5 to reflect good performance, 0.75 very good and 1 outstanding. After this analysis was performed, only four IA Global funds – out of the 133 deemed eligible – had a ratio that averaged higher than 0.5.
Coming in first place with an average five-year information ratio of 0.60 is Orbis Global Equity, compared with an average for the entire IA Global peer group of 0.22. The highest five-year information ratio recorded by the fund was 1.6, while its lowest has been -0.29.
Orbis Investments has a somewhat different approach to many asset management houses, in that it does not charge an annual management fee and instead takes a performance fee if its funds beat their benchmark; conversely, investors are refunded if the fund underperforms.
In a recent update, the company explained why it believes the traditional approach to fees can reduce the chances of active managers being able to outperform over the long run: “Even the best investment managers will have short-term fluctuations in their performance, with the risk that they perform poorly enough over short-term periods to be fired.
“Fund managers can’t control the measurement period over which their clients assess their performance. Therefore, the easiest way to reduce the probability of getting fired is to reduce ‘tracking error', i.e. reduce the difference between their fund’s performance and that of its benchmark. Benchmark hugging is a lot harder to resist than it may seem.
“Ultimately, the rational strategy for an investment manager running a business with fixed fees is to build a strong distribution platform, avoid making big mistakes by staying close to the benchmark, and aim for unlimited growth, even at the expense of investment returns.”
Between inception in 1990 and the end of May 2019, Orbis Global Equity made a total return of 1,834.31 per cent – compared with 682.30 per cent from its MSCI World benchmark and 600.89 per cent from its average peer. This is the best performance of the sector over this period.
Invesco Global Smaller Companies, managed by Nick Mustoe and Invesco’s global smaller companies team, took second place in this research with an average five-year information ratio of 0.52.
Rolling five-year information ratios of Invesco Global Smaller Companies and IA Global sector
Source: FE Analytics
As the name suggests, the fund concentrates on smaller companies but it has a strong enough correlation to the MSCI AC World for the information ratio to be statistically relevant (its r-squared over the past 10 years stands at 0.82).
Over the 10 years to the end of May 2019, the fund generated a 266.98 per cent total return, against 176.97 per cent from the sector and 262.49 per cent from its MSCI ACWI Small Cap benchmark. Over this same period, its annualised volatility of 13.04 per cent has been 1.5 percentage points higher than its average peers while it’s in the top quartile for maximum gain (but bottom for maximum loss) and Sharpe ratio.
Guinness Global Innovators is next with a 0.52 average five-year information ratio. Managed by Matthew Page and Ian Mortimer, the fund offers exposure to companies benefiting from innovations in technology, communication, globalisation or innovative management strategies.
Page and Mortimer build a high-conviction portfolio of around 30 equally-weighted large-cap stocks, focusing on those with the ability to earn an above-average return on capital and are trading attractive valuations.
The managers said: “We believe that active investment management, when coupled with the discipline and intellectual integrity of a good, rigorous investment process, will deliver superior performance for investors.”
The only other member of the IA Global sector to post an average five-year information ratio above 0.5 is SKAGEN Global, which is managed by Chris-Tommy Simonsen and Knut Gezelius. Its ratio came to 0.51 on average.
It concentrates on undervalued global companies that are unloved by the rest of the market, including those in emerging markets, with the aim of making an attractive risk-adjusted return for long-term investors.
SKAGEN portfolio managers invest in the funds they manage while costs are based on how well the funds perform, which the firm said means it is aligned with its investors.
“We dare to take unpopular choices, as long as they are in the clients’ best interests. We are aligned with our clients – when we do well, clients do well,” the group said.
Rolling five-year information ratios of Fundsmith Equity and IA Global sector
Source: FE Analytics
Of course, many readers will want to know how Fundsmith Equity – one of the most popular funds in the market at the moment – compares in this research. The fund was excluded as it does not have a track record going back to at least the start of 2007.
However, given the interest around this fund, we ran the numbers. Its average five-year information ratio stands at 1.2, putting it firmly in the ‘outstanding’ bucket; over the same period, the average IA Global fund has an average of -0.45.
The fund has achieved an impressive track record through manager Terry Smith’s long-term, low-turnover approach and bias towards quality-growth stocks.
“Smith’s superior stockpicking can’t be denied as this tends to be what keeps the fund supported during times when his style is more likely to be out of favour,” the FE Invest team said. “In relative terms, the fund remains impressive, only being challenged by a few other funds with similar investment strategies.”