Report: IMA Global Growth

This relatively crowded sector includes a diverse range of funds inhabited by a total of 201 constituents as at May 2008, according to Financial Express Analytics. This diversity follows through to the varying investment objectives of the range of fund providers operating within this space, offering differing strategies in an attempt to gauge returns from the global growth that has been experienced over the last few years. The only common factor lies in the stipulation in the IMA's sector classification that no more than 80% of a fund's assets may be invested in the UK.

Artemis is one fund manager that has an innovative approach to this issue, by placing a quant filter, named 'SmartGARP', at the front end of the investment process, in which each day the system combs equity databases of 6000 UK and international stocks, and ranks the equities on a number of key criteria.

The 153 funds, for which the 3 year histories are available, produced a composite return of 41.73% over the three years to May 2008. In keeping with the diversity within the sector, this average masks a wide range of outcomes: the poorest performing fund lost 4.56% to its investors, while the fund at the top of the table more than trebled the sector average, with a 131.28% gain over this 3 year period.

However, in more recent times, this sector has been out of favour given the global slow-down that has been triggered by the US’s liquidity crisis. This has caused a decline in capital flows into these global growth funds exemplified by 30 funds being terminated over the last 6 months. Therefore these long-term gains are not reflective of the recent losses experienced in this sector, highlighted by an average loss of 7.34% over the 6 months to April 2008, recorded by the 198 constituents over that period.

This loss has been somewhat recouped over the last month as global markets have begun to pick up once more, with the composite sector average return of 6.74% reported over the 3 months to May 2008. This has prompted many to believe that the worst of the credit crunch is over with a recovery period on the way.

Surprisingly, in a sector that exhibits such differing strategies, all but 13 constituents show an r-squared correlation, to the sector as a whole, which is greater than 0.75 over the past 3 years, with 41 funds exhibiting an r-squared of 0.95 or above, showing a near perfect correlation to the IMA sector average. This significant outcome is a result of the growing correlations between world markets caused by globalisation, coupled with the fact that the investment mandates employed by the majority of fund providers within this sector, restrict managers to deviate significantly from the sector average weightings in a bid to gain from the aggregate returns experienced without taking unnecessary risks.

This is further expressed when examining the sector’s average volatility of 12.31% over the 3 years. Although this figure has increased given recent turmoil, the majority of funds operate around a 2% band of this aggregate, with the most risky fund displaying a 3 year volatility of 18.59%.

The question for investors, advisers and fund managers alike is how to pick a way through the thousands of investments available in the global arena. With only 18 funds exhibiting a better risk return trade-off than the IMA sector average over the last 3 years, according to Financial Express Analytics, this is clearly a hard sector to out-perform in. Capita Financial Arch cru Global Growth has given the best risk-return results, displaying a 3 year return of 47.8% with a standard deviation of 10%, and is the only fund, based on this criteria, to have outshined the MSCI World Index’s risk-return results of 33.1% return given a given a standard deviation of 10.1% over the same period.

Despite the fact that markets have began to recover, the general consensus is that global market consumer confidence remains low, resulting in concerns regarding the overall direction of global markets to remain strong, therefore only very brave investors would want to enter a sector that many are still exiting.

*Source of all data: Financial Express Analytics