There are good reasons to be cautious at the moment with concerns over geopolitical tensions, potential monetary policy errors and a slowdown in economic growth dominating investors’ concerns.
Each of the major developed market regions have their own issues and geographic diversification can often provide greater protection from single market risk.
Below FE Trustnet considers some of the concerns surrounding US, European and UK equity markets and highlights some of the funds from the IA Global sector with the least exposure to each.
US
Beginning with the US, there has been no end to the stream of news emerging from the White House under US president Donald Trump in recent months.
Earlier this week the president announced that the US would no longer abide by the Iran nuclear deal negotiated by the previous administration putting pressure on oil prices and increasing the potential for a rise in inflation.
Meanwhile, a potential ‘trade war’ with China and the tensions over North Korea’s missile and nuclear weapons programmes have somewhat subsided for now but could well re-emerge.
Despite current levels of uncertainty, the US economy appears to be in rude health, yet even this could pose problems for investors.
Earlier this year markets took a tumble following positive employment figures as investors feared this could lead the Federal Reserve to raise interest rates at a faster pace than many have priced-in.
Additionally, with stocks already trading at record levels, it would be understandable if investors were concerned about the potential for further returns from the US.
Table of global funds with <20% in US equities
Source: FE Analytics
As it is such a large part of the MSCI World index (55.2 per cent), funds can have a high weighting to the equity region while remaining underweight.
Overall just seven funds in the IA Global sector that are not fund-of-funds have less than a 20 per cent weighting to US equities.
Stewart Investors has three funds on the list with the £549m Stewart Investors Worldwide Sustainability run by FE Alpha Manager David Gait and Nick Edgerton a notable inclusion.
The fund invests in companies which are positioned to benefit from, and contribute to, the sustainable development of the countries in which they operate.
As such, the fund has large weightings to Europe (36.7 per cent) and the emerging markets (10.5 per cent).
Fellow FE Alpha Manager Robin Hepworth and co-manager David Osfield’s £227m EdenTree Amity International also makes the list.
It is another that focuses on companies which make a positive contribution to society and the environment through sustainable and socially responsible practices.
The only five FE Crown-rated fund on the list is the benchmark-unconstrained £456m R&M World Recovery run by Hugh Sergeant.
The manager looks for companies that he believes will benefit from a recovery in profitability over the medium and longer term.
It is a more diversified portfolio than most with 403 stocks currently held. The US is still the largest weighing in the portfolio with China and Japan also worth an allocation of more than 10 per cent.
UK
The UK has been in the doldrums for some time. Indeed, earlier this week Columbia Threadneedle’s Richard Colwell noted that the issues have stemmed since long before the Brexit referendum.
The market is heavily weighted to commodities relative to other areas and as such has underperformed the rest of the world for much of the past decade.
While the manager sees opportunities thanks to this bout of poor performance, others may be more fearful.
Like the US, interest rates and inflation remain an issue, with the Bank of England’s Mark Carney choosing not to raise rates at Thursday’s Monetary Policy Committee meeting.
But overhanging the market is the decision to leave the EU and the type of relationship that will emerge after negotiations are completed.
As such, the market has leaned towards international earners as the pound has suffered, although more recently dollar weakness and pound strength has benefited more domestic firms.
For those wishing to steer clear of ‘home-bias’ altogether 12 funds in the IA Global sector have an allocation to UK equities of less than 3 per cent.
Table of global funds with <3% in UK equities
Source: FE Analytics
The only five FE Crown-rated portfolio is the £400m Seilern Stryx World Growth fund run by Raphael Pitoun.
The fund invests in OECD (Organisation for Economic Cooperation & Development) country companies of the highest quality with proven track records, sound financials and predictability of future earnings growth.
Premier Global Alpha Growth, Artemis Global Growth and Artemis Institutional Global Capital are all four FE Crown-rated options for investors.
Europe
Last up is Europe, which has been popular with investors as the French and German elections saw pro-EU parties returned to power last year against a backdrop of rising support for populist movements.
On the one hand the region has been gaining in popularity as economic growth has picked up and political tension – with the exception of Italy – has largely passed.
However, there remain several concerns for investors.
European Central Bank (ECB) president Mario Draghi has talked about the end of the unprecedented quantitative easing measures that have helped support markets in recent years.
While this has yet to happen, the withdrawal of support for the European economy as well as the potential for rising inflation could be seen as negative.
Indeed, Pimco managing director Andrew Bosomworth noted that while the ECB should be straightforward for the next year or so, “after 2020 the central bank will face a more complex set of challenges”.
Meanwhile, the market is dominated by financials, a sector that has struggled under more stringent capital requirements following the European sovereign debt crisis, which investors need to be mindful of.
Finally, many investors have previously piled into Europe in the hope that the region was set for a boom only to find it was another false dawn.
Therefore, despite its popularity, there will be some that would rather avoid the region altogether. As such, below are the funds with less than 6 per cent exposure to Europe.
Table of global funds with <6% in European equities
Source: FE Analytics
The only four FE Crown-rated fund on the list is the £54m Investec Global Special Situations fund run by Alessandro Dicorrado and Steve Woolley.
The pair take a contrarian approach to investing, with financials and industrials making up 53.6 per cent of the portfolio.
Also of note is the Royal London GMAP Dynamic fund run by Trevor Greetham. The multi-asset portfolio is 50 per cent structurally weighted to the UK meaning it typically has a lower exposure than many global funds to international stocks.