Baillie Gifford Global Discovery, Henderson Global Growth and Lindsell Train Global Equity are among a small handful of global funds to achieve sector-topping returns that are significantly differentiated from the MSCI AC World index, according to data from FE Analytics. 
As the end of the year approaches, an increasing number of industry professionals are warning that 2017 could be a particularly volatile and uncertain year for global markets.
In a recent article, FE Alpha Manager James Thomson (pictured) told FE Trustnet that investors are likely to experience ‘Whack-A-Mole’ markets next year, given the uncertainty surrounding president-elect Donald Trump’s future policies.
“I struggle to believe we’re in this period of euphoria and irrational exuberance when sentiment is near 20-year lows,” he said.
“I am still positive, my watch list is bursting with ideas, but I am cognisant of the fact we are in this Whack-A-Mole market where Trump will keep coming up with these new policies and new little tweaks that can create volatility, and that could be a frustrating feature of 2017.”
As such, FE Trustnet decided to take a look at the funds in the IA Global sector which, over the past five years, appear to have paid little attention to the behaviour of the MSCI AC World index and have managed to achieve strong total returns.
Out of 194 global equity funds that have a five-year track record to the end of Q3 this year, just 10 have achieved a top-quintile total return over this time frame while also achieving a cumulative bottom-quintile r-squared ratio (which measures the percentage of a fund’s performance that can be directly attributed to a benchmark) and a top-quintile alpha generation (which measures a fund’s return in addition to a benchmark) versus the MSCI AC World index.
Out of this list, the five crown-rated GS Global Small Cap Core Equity Portfolio fund was discounted because it focuses on smaller companies and it would therefore be unfair to compare its level of differentiation against a large-cap index. Of course, that’s not to say the fund hasn’t performed well.
Baillie Gifford Global Discovery – which has an active share of 99 per cent – has also been discounted as it has a bias towards smaller companies and is benchmarked against the S&P Global Small Cap index.
Unsurprisingly, a further three of these funds specialise in healthcare which, again, explains why they are so differentiated from the index. Fidelity Global Health Care, L&G Global Health & Pharmaceutical Index Trust and Schroder Global Healthcare are all in the top 20 for their total returns over five years to the end of October 2016 and have an r-squared ratio of 0.54 or below (with a ratio of 1 representing a perfect tracker fund).
After these funds were discounted, just five funds remained and can be seen in the below list.
Source: FE Analytics
Out of these, the fund that has achieved the highest total return over five years is the five crown-rated Lindsell Train Global Equity fund, which was launched by Michael Lindsell in March 2011. He was then joined by co-managers James Bullock and FE Alpha Manager and co-founder of Lindsell Train Nick Train in 2015.
Over five years to the end of Q3 2016, the £2bn fund has returned 149.15 per cent compared with its sector average’s return of 73.82 per cent and the MSCI AC World index’s return of 94.51 per cent and. It also has an r-squared ratio of 0.6 and the second-highest alpha generation in the whole sector of 7.18.
Lindsell Train Global Equity is well-known for its concentrated portfolio of high-quality, developed market growth companies. Examples of its largest holdings include Diageo at 7.5 per cent, Unilever at 7.4 per cent and Heineken Holdings at 6.9 per cent of the portfolio.
In terms of regional weightings, it holds 34.1 per cent in the US, 25.7 per cent in the UK, 24.1 per cent in Japan and 12.7 per cent in Europe ex UK.
Martin Bamford, managing director of Informed Choice, said: “Lindsell Train Global Equity has an incredible performance track record, especially over three and five years. In funds which are not afraid to deviate from their benchmarks, we would expect to see more variance in short-term performance figures, which is demonstrated in the three and six month stats for this fund, something that investors can comfortably ignore.”
“The courage of the fund managers’ conviction is demonstrated in the concentrated portfolio of stocks held by this £2bn fund, with a range of 20-35 global equity stocks held. Conviction is also demonstrated with low portfolio turnover. This is a great example of how an actively managed global equity fund should be managed.”
The second top-performing fund on the list is Morgan Stanley Global Opportunity, which has five FE crowns and was launched by manager Kristian Heugh in November 2010.
Over five years to the end of Q3 2016, the $1.1bn fund – which is domiciled in Luxembourg – has returned 134.73 per cent, outperforming its sector average and MSCI All Country World benchmark by a respective 60.91 and 40.22 percentage points. It has outperformed the MSCI AC World index by 40.22 percentage points.
Performance of fund vs sector and benchmark over 5yrs to Q3 2016
Source: FE Analytics
It also has an r-squared ratio of 0.63 and an alpha generation of 4.21.
Heugh seeks both established and emerging high-quality companies which he deems to be undervalued by the market. Almost 10 per cent of the fund’s portfolio is in Facebook while a further 7.42 per cent is in Chinese tutoring services provider Tal Education Group. Its third-largest holding is Amazon at 6.32 per cent.
Next up with a total five-year return of 131.83 per cent to the end of Q3 this year is the four crown-rated Baillie Gifford Long Term Global Growth fund, which has been managed by Mark Urquhart since 2005.
The fund aims to provide growth through a concentrated portfolio of 33 large and mega-cap stocks, although up to 10 per cent of the fund can be invested in collective investment schemes or deposits.
Jason Hollands, managing director at Tilney Bestinvest, said: “The Baillie Gifford Long Term Global Growth fund is an institutional fund with a similar strategy to the highly popular Scottish Mortgage Investment Trust also managed by the firm, pursuing an unconstrained approach to global equity investing with a focus on high growth companies and a high level of overlap in the top stock holdings which include the likes of Amazon, Facebook, Tencent, Baidu, Tesla Motors and Illumina.”
“I like this high conviction approach which Baillie Gifford have proven adept at. But I’d still opt for Scottish Mortgage if you want this approach given the lower costs and the greater flexibility of a closed end structure which includes the ability to invest pre-IPO.”
Baillie Gifford Long Term Global Growth has the lowest r-squared ratio in the list at 0.57 per cent and has an alpha generation of 1.7 per cent.
The fourth fund is Henderson Global Growth which, over the past five years to the end of October 2016, has returned 123.74 per cent, has an r-squared ratio of 0.63 and an alpha generation of 3.37.
Performance of fund vs sector and benchmark over 5yrs to Q3 2016
Source: FE Analytics
The four crown-rated fund is headed up by FE Alpha Manager Ian Warmerdam, who is the director of Henderson global growth equities.
He aims to provide long-term growth through a concentrated portfolio of 50 holdings, which range across the market cap spectrum and are spread across the US, Europe, South Africa, the UK and Asia.
While almost half of the fund is in stocks that are more than £20bn in size, 23.1 per cent are in companies that are between £1bn and £5bn will a further 11.7 per cent are between £5bn and 10bn.
Warmerdam has a bias towards companies that offer a competitive advantage through innovation and, as such, his largest sector weighting is in information technology at 32.7 per cent. His three largest holdings are Apple, Amazon and Cognizant Technology Solutions.
Finally, Standard Life TM Global Equity has achieved a total return of 104.84 per cent over the last five years to the end of the last financial quarter.
The £67m fund – which is managed by Dominic Byrnes and Mikhail Zverev – also has a cumulative bottom-quintile r-squared ratio of 0.63 and an alpha generation of 1.77 over the same time frame. However, it is unavailable on most major retail platforms and there is little available information on the fund.