Fundsmith Equity, Old Mutual Global Equity and GS Global CORE Equity Portfolio are among the global funds topping the tables with the best risk-adjusted returns over the past five calendar years, research by FE Trustnet shows.
Generally expressed as a number or rating, risk-adjusted returns measure how much risk has been involved in producing a return over a period of time.
The most commonly-used measure is the Sharpe ratio, which calculates the level of a fund’s return over and above the return of a notional risk-free investment, such as cash or government bonds.
The difference in returns is then divided by the fund’s standard deviation (volatility). The resulting ratio is an indication of the amount of excess return generated per unit of risk.
Although there is no absolute definition of a “good” or “bad” Sharpe ratio, when analysing similar investments, the one with the higher Sharpe ratio has achieved more return while taking on no more risk than its peers — or, conversely, has achieved a similar return with less risk. A negative ratio would indicate that the fund actually made less than the risk-free amount.
After finding out which UK funds consistently topped tables with the best risk-adjusted returns tables year-in, year-out over the last calendar years, we have done the same with the IA Global sector.
We have done so by creating our own customised report with the discrete annual Sharpe ratio between 2013 and 2017 for the 304 funds in the IA Global Sector, all of which invest at least 80 per cent of their assets globally in equities.
Only funds in the first and second quartile for Sharpe ratio and performance in each of the past five calendar years have been included, resulting in the seven funds shown below.
Source: FE Analytics
Fundsmith Equity
First up is £14.70bn Fundsmith Equity, overseen by FE Alpha Manager Terry Smith since launch in 2010.
With a gain of 179.5 per cent, the fund has delivered the highest returns of the seven funds. It also has a five FE Crown rating, is run by an FE Alpha Manager and is included on the FE Invest Approved List.
The fund has been top quartile for risk-adjusted returns over three of the five years analysed; it has done so with a five-year cumulative volatility of 10.93 per cent.
Fundsmith Equity is defined by Smith’s investment philosophy, characterised by a preference for companies showing high return on capital and with little regard to valuation.
Smith tends to invest in defensive areas with dividend producing qualities and likes industries serving repeatable needs such as consumer staples, manufacturers or medical device producer.
Current top weightings by sector are technology, consumer staples and healthcare, with Paypal, Amadeus and Microsoft among the fund’s top 10 holdings.
Over the last five calendar years, Fundsmith Equity has delivered a 179.50 per cent total return, compared with a gain of 88.28 per cent for the average fund in the IA Global sector. It has an ongoing charges figure (OCF) of 1.05 per cent.
Old Mutual Global Equity
Four FE Crown-rated Old Mutual Global Equity, overseen by Amadeo Alentorn, Ian Heslop and Mike Servent since 2004 is next on the list.
With £857.9m under management, the fund is one of the smallest in this research and, with a five-year cumulative volatility of 11.12 per cent, is also the second most volatile after Fidelity Special Situations.
With a total of 472 holdings, its biggest weighting is to North America (62.2 per cent) and has Facebook, Apple, Exxon Mobil Corporation, Microsoft and Boeing among its top ten stocks.
Performance of funds vs sector over 5yrs
Source: FE Analytics
Over the five years ending in December 2017 the fund has delivered a 166.67 per cent total return compared with an 88.28 per cent gain for the average fund in the IA Global sector.
Old Mutual Global Equity has OCF of 1 per cent.
GS Global CORE Equity Portfolio
Another large fund in our list is the $4.5bn Global CORE Equity Portfolio by Goldman Sachs, a fund that uses a quantitative approach for global equities.
The team uses structured and unstructured data to score global stocks on three metrics – Quality, Value and Momentum – allowing them to identify good companies and good investments.
Over the five years ending in December 2017, GS Global CORE Equity has delivered a 149.84 per cent total return compared with an 88.28 per cent gain for the average fund in the IA Global sector. The fund has done so with a five-year cumulative volatility of 10.08 per cent.
GS Global CORE Equity Portfolio has an OCF of 0.65 per cent.
Fidelity Global Special Situations
FE Alpha Manager Jeremy Podger’s Fidelity Global Special Situations is the next global fund topping the tables with the best risk-adjusted returns over the past five calendar years.
With a 11.17 per cent five-year cumulative volatility, the fund is the most volatile of the seven. However, a total return of 144.84 per cent compared with an 88.28 per cent gain for the average IA Global sector fund shows volatility hasn’t hampered returns.
Performance of funds vs sector over 5yrs
Source: FE Analytics
Podger’s investment strategy has developed over a number of years since he first started running global equity funds in 1996.
With a focus on valuation, the manager buys three types of companies: those that are exceptionally undervalued, those that have unique franchises that can grow their earnings faster than their peers, and those undergoing corporate change that could be the catalyst for share price growth.
Another differentiating feature of the fund is its ability to invest in emerging markets and to short stocks, which, according to the FE Invest Team is “relatively unusual for global funds”.
Fidelity Global Special Situations has an OCF of 0.95 per cent.
Schroder ISF Global Smaller Companies
Another fund of note is Schroder ISF Global Smaller Companies, overseen by Matthew Dobbs and Richard Sennitt since 2006; the only small-cap focused fund to make the list.
The fund has delivered the lowest returns of the seven funds, but it has also been the least volatile with a five-year cumulative volatility of 9.63 per cent.
Unlike many global funds, Schroder ISF Global Smaller Companies invests most of its assets in equities of small-sized companies worldwide and is underweight information technology and America.
The fund is overweight industrials, consumer discretionary and financials.
Over five years, Schroder ISF Global Smaller Companies has delivered a 131.50 per cent total return compared with an 88.28 per cent for the IA Global sector.
The fund has an OCF of 1.33 per cent.
Other global funds beating their peers for risk-adjusted returns are Raphael Pitoun’s Seilern Stryx World Growth and Peter Saacke’s Artemis Global Growth. The funds have had respective gains of 141.84 per cent and 132.75 per cent over the past five calendar years.