Beating the MSCI World index is notoriously difficult, but investors can still manage the feat if they pick the right funds, according to experts.
Last year, the IA Global sector beat the index for only the second time in a decade – the other being 2017. This makes for grim reading when added together, as over the past 10 years the index has trounced the average active fund by around 60 percentage points.
Total return of IA Global sector vs MSCI World index over 10yrs
Source: FE Analytics
The index has delivered stellar returns since the financial crash of 2008, with just two years when investors would have lost money in 2011 and 2018. In both, the index fared better than the average active fund.
This is partly thanks to its high weighting to America, which now makes up more than two-thirds of the index. By contrast, the three largest non-US markets are Japan, which represents just 6.7% of the World index total, the UK (4.2%) and France (3.4%).
The top four holdings – Apple, Microsoft, Amazon and Alphabet – account for 12.9% of the index, making them larger than the Japanese and UK markets combined.
John Redwood MP, the chief global strategist for Charles Stanley, said: “Last year, the dominance of digital technology was always likely to accelerate, as the Covid-19 lockdowns forced many more people to ‘go digital’ – buying more smartphones, tablets and laptops.”
Indeed, the technology sector now has an overall 22% weighting, while the “once-mighty” energy sector, which includes oil & gas, is now just 3% of the index.
Redwood added that this year, it seemed possible that recovery sectors and geographical areas would fare better, yet it has still proven difficult to beat the World index by investing in these areas. In the first six months of 2021, the average IA Global fund has made 13% while the MSCI World is up 15.5%.
“It is not easy for an individual equity investor to beat an index as most indices have three great advantages. The first is the index does not incur any charges buying and selling and holding a portfolio, whereas an investor does,” he said.
Second, most indices only include the larger companies, or a representative sample of some of the smaller companies available. This means they are ruthless at cutting out underperforming shares.
Thirdly, and in contrast to the above, indices also run their winners. As a company’s share price rises, the index does not take profits on the way up.
“Quite often, market or index performance rests heavily on a limited list of very successful companies, so keeping good exposure to them is crucial to performing,” Redwood said.
“Good active managers can ring the changes as moods in the market swing, or they can find long-term value companies that provide an edge. Nevertheless, the World index still takes some beating.”
Rachel Winter, an associate investment director at Killik & Co, said many funds focusing on sustainability had outperformed the index, particularly in recent years as sustainable investing has become more popular and the sector has experienced high inflows.
“These funds have also generally avoided the fossil fuel companies that have performed very poorly of late. The Royal London Sustainable World Trust has beaten the MSCI World over the past 20 years,” she added.
Total return of Royal London Sustainable World Trust vs IA Global sector MSCI World index over 20yrs
Source: FE Analytics
Jake Moeller, senior investment consultant at Square Mile, said the TB Evenlode Global Income fund would be another strong choice for investors.
The fund buys high-quality, growing, dividend-paying companies and is likely to have more of a defensive profile than the broader global equity market. As such it has failed to beat the index since its launch in November 2017, although is just 4 percentage points shy.
“This fund is likely to offer a level of downside protection in falling markets, but lag when markets are led by lower-quality and more cyclically sensitive companies,” said Moeller.
Kamal Warraich an investment analyst at Canaccord Genuity Wealth Management, said another way investors could look to beat the index is to spread their portfolio across five equally weighted funds, four of which have beaten the index.
Source: FE Analytics
He suggested the Scottish Mortgage Investment Trust as well as Fundsmith Equity and Lindsell Train Global Equity as three large-cap funds that offer very different options.
Scottish Mortgage invests in private equity as well as its public company assets and at present is overweight the Asia Pacific region. Fundsmith provides the US exposure, while Lindsell Train has more invested in the UK and Japan.
Alongside these three funds, he recommended the LF Montanaro Better World fund, which is a mid-cap specialist focusing on quality growth companies, while Law Debenture investment trust is a multi-cap value portfolio that has a higher yield than the others and can also invest in private companies.
The latter has underperformed the MSCI World over the past decade, but should provide stronger performance if the market recovery into value stocks so far this year continues for a longer stretc