Global trackers have become extremely popular with investors. In theory, they should bring diversification to a portfolio, ensuring people are investing in line with the allocations of the market. However, with markets increasingly concentrated around a small handful of stocks, global trackers' ability to diversify portfolios have challenged.
As Darius McDermott, managing director at FundCalibre, said: “If you hold the world index, by definition, you probably hold about 70% US and 30% tech”. More than 20% of that would be in the Magnificent Seven (Microsoft, Nvidia, Apple, Tesla, Alphabet, Meta and Amazon).
Laith Khalaf, head of investment analysis at AJ Bell, explained that this was fine if investors were comfortable with this level of exposure. However, he added that recent wobbles in the Magnificent Seven’s share price due to the unveiling of DeepSeek may provide a “timely nudge for investors to check in on their overall exposure to the US stock market.”
Below, fund selectors identified a range of funds across different markets and sectors that could complement investors' traditional global trackers.
WS Lightman European
For McDermott, the perfect complement to a global tracker would depend on “where you want your diversification”. However, he suggested that a value or income strategy would make a “good complement to a growth-dominated global index”.
He pointed to the £850m WS Lightman European fund, managed by Rob Burnett, as a good choice for this. Over the past five years, it has risen 58.3%, a top-quartile performance in the IA Europe Excluding UK sector.
Performance of fund vs the sector and benchmark over the past 5yrs
Source: FE Analytics
McDermott explained that Burnett emphasised stocks with low price-to-book and price-to-earnings ratios and attractive cashflow yields. “Burnett believes these are the best characteristics over the long-term for European shares”, McDermott added.
While the portfolio has slid into the third quartile over the past one and three years, McDermott argued that it remained a highly robust value play that investors should not underestimate.
McDermott said: “As one of the few remaining true European value funds, Lightman stands out as a contrarian complementary option”.
Vanguard FTSE Developed Europe Ex-UK UCITS ETF
Bella Caridade-Ferreira, chief executive officer at Fundscape, was also a fan of Europe. “There is plenty to like in European stock markets,” she said. She noted Europe is home to the 'Granolas' – 11 large European stocks that dominate its stock market, covering a range of sectors from technology to healthcare and consumer products. These include GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, SAP and Sanofi.
“Over the past three years, the Granolas have performed in line with the Magnificent Seven with lower volatility (although there was some volatility in the second half of 2023)”, Cardade-Ferreira explained.
She identified Vanguard FTSE Developed Europe Ex-UK UCITS ETF as an attractive option for passive exposure to these European stocks. Despite being a tracker, it has slightly outperformed the market, with a total return of 50% over the past five years.
Performance of the fund vs the sector and benchmark over the past 5yrs
Source: FE Analytics
She added that holding this fund would position investors well for a European resurgence. For example, ASML has reported strong earnings, while Novo Nordisk has benefitted from recent consumer enthusiasm for weight loss drugs.
Caridade-Ferreira concluded: “With everyone wishing for a magic cure for those extra inches, it looks as though Europe could do well in 2025” and would complement a world tracker.
Abrdn Global Infrastructure Equity
Katie Trowsdale, co-manager of the abrdn Myfolio Managed range, pointed to the £325.3m abrdn Global Equity Infrastructure fund. The range recently shifted its mandate to allow the managers to invest more in external funds, but Trowsdale stayed among the abrdn stable for her pick.
The fund has delivered 108.3% in the IA Infrastructure in the past 10 years. It was in the top quartile over the past three years but slid into the second quartile last year.
Performance of the fund vs the sector over the past 10yrs
Source: FE Analytics
For Trowsdale, the fund’s focus on essential infrastructure, such as transportation and energy, means it invests in businesses with stable cashflows. Additionally, she explained that infrastructure frequently benefits from cross-political government support and regulation, which brings an “extra layer of security”.
Moreover, infrastructure investments tend to have a “lower correlation with broader equity markets”. This can make investing in them an effective way of enhancing portfolio resilience and protecting from downturns that may hit the broader equity market.
She said: “By combining the broad market exposure of a global tracker with the stability and growth potential of this fund, investors can achieve a more balanced portfolio.”