Despite the enormous number of stocks to choose from, just two five crown-rated funds in the IA Global sector have a correlation of less than 0.5 with one another, according to research by FE Trustnet.
Sanlam Global High Quality and R&M World Recovery are the two funds with a correlation below the indicated level, with a figure of 1.0 indicating a perfect correlation and 0 signalling that they are uncorrelated.
Below we consider both of these funds in more detail.
Sanlam Global High Quality is managed by Pieter Fourie alongside deputy William Ball. As its name suggests, the fund aims to invest in quality businesses, described as: “Companies that typically have sustainable competitive advantages supported by durable assets, significant free cash flow after capital expenditure, low balance sheet leverage and strong management teams.”
Fourie said it is important to note that a quality business is not just one that exhibits these characteristics over three or four years.
“These great-quality businesses are difficult to find from scratch. It’s easy afterwards to say it was obvious Alphabet would be a great business 10 years ago, but it’s trickier to identify them today and marry to that position for the long term to extract maximum value,” he explained.
Instead, the manager prefers well-established businesses where he can forecast the future cash flow they will generate over a normal cycle.
Fourie recently told FE Trustnet that this strategy, which is similar to that of Berkshire Hathaway chairman Warren Buffett, requires investors to commit their money for between five and eight years to see the benefits. He admitted it is not to everyone’s tastes.
“In terms of what we do, sometimes my existing investors refer to the strategy as quite boring,” he said. “Now that’s good enough for me, Buffett says compounding should be boring.”
Fourie is part of a team of six analysts who each cover approximately 30 stocks in the MSCI World index to build a concentrated portfolio of between 20 and 35 holdings.
The manager is benchmark-agnostic and currently has no exposure to telecoms, banks, utilities or industrials.
Sanlam Global High Quality has made 87.51 per cent over the past five years compared with 87.61 per cent from the MSCI World index and 70.97 per cent from the IA Global sector.
It has struggled recently and is barely in positive territory over the past year. However, it has doubled the gains of its sector over the past decade.
The £288.6m fund has ongoing charges of 0.6 per cent.
Square Mile Investment Consulting & Research said that investors in R&M World Recovery need either “an iron constitution or to recognise that a little may go a long way”. While the team admires manager Hugh Sergeant, it warned this is a high-risk, high-return strategy that should only be considered over the long term.
“Given the natural inclinations of the manager, with the recovery aspect lending a value tilt and a willingness to invest in medium- and smaller-sized companies, the fund may exhibit higher volatility at times and can struggle in riskoff environments,” said the Square Mile analysts.
“This approach can therefore lead to meaningful performance deviations versus the market at times, both on the up and the downside. However, in our view the experience of the manager and the underlying philosophy and portfolio biases, as well as the investment approach and supporting resources of the firm, are of a pedigree that should enable the fund to meet its performance objectives over time.”
The fund uses a quant screen it calls MoneyPenny to evaluate stocks according to four categories – growth, recovery, asset-backed and quality – with differing indicators depending upon the category.
For example, a recovery stock will have likely experienced share price weakness and depressed margins. Using this system, the manager identifies which stocks deserve closer attention; it also provides an indication as to the most appropriate timing of any purchase or sale.
The R&M World Recovery fund has made 101.51 per cent over the past five years. It is £462.7m in size and has ongoing charges of 1.17 per cent.
Performance of funds vs sector and index over 5yrs
Source: FE Analytics
While there are only two five crown-rated funds in the sector with a correlation below 0.5 with one of their top-rated peers, there are five more with a correlation of less than 0.55.
These are First State Global Listed Infrastructure, Fundsmith Equity, MI Metropolis Value, Pictet Water and Standard Life Investments Global Smaller Companies.
Five crown-rated IA Global funds with lowest correlation
| Name | First State Global Listed Infrastructure | Fundsmith Equity | MI Metropolis Value | Pictet Water | R&M World Recovery | Sanlam Global High Quality | Standard Life Investments Global Smaller Companies |
|---|---|---|---|---|---|---|---|
| First State Global Listed Infrastructure | N/A | 0.80 | 0.56 | 0.82 | 0.53 | 0.76 | 0.54 |
| Fundsmith Equity | 0.80 | N/A | 0.71 | 0.77 | 0.53 | 0.86 | 0.66 |
| MI Metropolis Value | 0.56 | 0.71 | N/A | 0.50 | 0.73 | 0.59 | 0.65 |
| Pictet Water | 0.82 | 0.77 | 0.50 | N/A | 0.59 | 0.82 | 0.64 |
| R&M World Recovery | 0.53 | 0.53 | 0.73 | 0.59 | N/A | 0.49 | 0.68 |
| Sanlam Global High Quality | 0.76 | 0.86 | 0.59 | 0.82 | 0.49 | N/A | 0.54 |
| Standard Life Investments Global Smaller Companies | 0.54 | 0.66 | 0.65 | 0.64 | 0.68 | 0.54 | N/A |
Source: FE Analytics
The previous article in the series looked at top-rated funds in the IA UK All Companies sector with a low correlation to one another.