Whether it is an election in the UK, high valuations in the US, extraordinary monetary policy in Europe and Japan or negative sentiment towards emerging markets, it seems that every equity sector faces risks in the current market.
As a result, now may be a good time for investors to turn to funds within the IA Global sector as its managers have literally the whole world to choose from for ideas. Unfortunately, however, a number of FE Trustnet studies have shown that the majority of global funds have failed to beat their respective benchmarks over the years.
Nevertheless, there are funds that have shown the ability to outperform on a consistent basis. In the next article of the series, FE Trustnet looks at five of FE Research’s favourite funds within the IA Global sector for anyone looking to diversify their 2015/16 ISA.
GAM Global Diversified
First on the list is the £610m GAM Global Diversified fund, which has been headed up by FE Alpha Manager Andrew C Green since 1984.
Green is one of the select 30 FE Alpha Manager “hall of famers” who has held the coveted rating – which highlights the top 10 per cent of managers for risk-adjusted alpha, consistency of outperformance versus their benchmark and outperformance in both up and down markets – in every year since they were introduced in 2009.
The manager has certainly demonstrated long-term outperformance. According to FE Analytics, GAM Global Diversified has returned 4,162.21 per cent since its launch in January 1984, beating its MSCI World benchmark by more than 2,607 percentage points.
Performance of fund versus index since Jan 1984
Source: FE Analytics
The four crown-rated fund is also a top decile performer over 10 and 15 years, but performance over more recent timeframes has been more disappointing.
It has underperformed against its benchmark over one, three, five and 10 years – although that is largely due to the fund’s bottom-decile losses of 0.64 per cent when the index returned 11.46 per cent.
Those losses were due to Green’s underweight position in the US equity market – which still stands today. Instead, the fund is overweight Europe and Japan, which combined make up 42 per cent of its assets. The manager also has 15 per cent in cash, reflecting his bearishness on the current market.
Its total expense ratio is 1.14 per cent.
Fundsmith Global Equity
Next on the list is FE Alpha Manager Terry Smith’s five crown-rated Fundsmith Equity fund, which recently joined the FE Select 100 in the latest rebalancing.
The team at FE Research thinks the fund, which is now £3.4bn in size and very concentrated, is a good choice for investors who are looking for broad global exposure and want a portfolio that looks very different to the wider market.
“The fund avoids cyclical industries such as airlines, banks and real estate, and looks for companies generating high levels of cash which should be stable or growing in the future. These tend to be long-standing businesses,” the team said.
“Smith and his team consider there to be 68 stocks in their investable universe.”
Smith focuses on high quality companies with advantages that are hard to replicate, that do not require significant leverage to outperform and are resilient to changes in their industry.
This approach has worked well since its launch in November 2010. Our data shows it has been the fifth best performer in the highly competitive sector over that time with returns of 109.15 per cent, beating the MSCI World index by close to 40 percentage points.
Fundsmith Equity has also beaten both the sector and the index in every calendar year since its launch.
However, the FE Research team warns that performance could start to wain when interest rates rise as the select number of defensive companies Smith owns are starting to look expensive. Fundsmith Equity has an ongoing charges figure (OCF) of 0.99 per cent.
Invesco Perpetual Global Opportunities
The £170m Invesco Perpetual Global Opportunities fund is also a member of the FE Select 100.
The four-crown rated portfolio has been headed up by FE Alpha Manager Stephen Anness since January 2013. The FE Research team likes his concentrated and very active approach to global equities.
“[Anness] focuses on valuation, looking for those companies with good growth prospects which are undervalued,” FE Research said.
“Roughly 80 per cent of the fund is in ‘compounders’ – companies with high and sustainable returns on investors’ capital, and 20 per cent in ‘special situations’ – companies which have been through a rough patch and need a change in strategy or management.”
“The managers invest on a three-year view and will sit through periods in which their stocks underperform.”
According to FE Analytics, Invesco Perpetual Global Opportunities has been a top quartile performer in the sector since Anness has been at the helm, with returns of 53.99 per cent. It was top decile in the rising market of 2013, but underperformed in last year’s more difficult conditions.
Performance of fund versus sector since Jan 2013
Source: FE Analytics
While US equities make up 40 per cent of the fund, that represents an underweight position relative to the sector average. Instead, Anness has a big weighting to the UK and China. His largest sector exposures are to financials and consumer staples.
Invesco Perpetual Global Opps has an OCF of 0.95 per cent.
Kennox Strategic Value
Geoff Legg and Charles L Heenan of the £335m Kennox Strategic Value fund were handed their FE Alpha Manager rating at the start of the year.
The managers take a very different approach to the majority of their peers as they have a strict valuation discipline. This means that they tend to build up their cash during rallies in order to deploy it when the market falls.
Heenan and Legg’s strategy means the fund has been one of the sector’s best performers since its launch in July 2007, with returns of 85.97 per cent. As a point of comparison, the MSCI AC World index has gained 67.99 per cent over this time.
Those returns include top quartile numbers in the falling market of 2011 and a 9.80 per cent return in the crash year of 2008 when both the sector and index posted double-digit losses.
It has underperformed in more recent years as the managers have built up cash and avoided the US – which Legg and Heenan have described as one of the worst markets for long term investors due to current valuations.
The managers currently have just 12 per cent in the US and 17 per cent in cash. The fund is one of the best performers in its sector in 2015.
Kennox Strategic Value has an OCF of 1.13 per cent.
Baillie Gifford Global Discovery
The final portfolio on the list is FE Alpha Manager Douglas Brodie’s Baillie Gifford Global Discovery fund.
The £175m portfolio is different to most of the others in the IA Global sector, and the other funds on this list, as it has a bias towards smaller companies and, in particular, businesses with disruptive technology.
This means that Brodie has a high weighting to technology and healthcare companies as he focuses on “companies that offer significant growth prospects with an emphasis on companies operating in industries with potential for structural change and innovation”.
While the fund has been more volatile than the sector average, Baillie Gifford Global Discovery has been a top decile performer since its launch in May 2011, with returns of 81.3 per cent.
Performance of fund versus sector since May 2011
Source: FE Analytics
The fund was top quartile in 2012 and 2013. It was hit hard in early 2014 when tech stocks fell as a result of the rotation out of high-multiple growth stocks, but rebounded strongly to outperform the sector. It is also top decile so far this year.
Brodie’s top 10 holdings include IP Group, 4D Pharma, Ocado and TripAdivsor. The fund’s OCF is 0.78 per cent.