Isa ideas – buying the world by investing in global funds

13th February 2014


Should investors be considering the global sector for their Isa? Much of course depends on what they have invested already, their goals and more. The sector is by its nature very diverse so that obviously affects the calculation. Investment journalist Cherry Reynard examines the issues.

A basic description of the sector

Some investors will want to stick close to their home markets. There are plenty of reasons why this is a ‘safer’ option; investors don’t have to trouble themselves with currency exchange, negotiating political tensions or the getting to grips with the nuances of foreign companies. However, global funds offer a means to invest in countries where economic growth is higher, in sectors that are poorly represented in the UK, or in companies that are global leaders in their particular field. This can provide the very valuable benefit of diversification.

Global funds divide into those striving to generate income and those striving to generate capital growth. The two are not mutually exclusive, but funds in the global sector will favour capital growth over delivering an income stream. The global sector may also include sector funds, such as those investing in technology or natural resources but that obviously have a global remit.

The range of fund strategies within sector

The Global Growth sector is diverse. Fund managers have a broad range of views on what causes share prices to grow over the long term. Some – such as ‘recovery’ or ‘special situations’ managers – believe that it is all about a share trading at a low price. The aim is to buy a company when it is out of favour with the market, possibly as a result of a run of bad luck, or negative publicity, and will wait to see if sentiment – and therefore the share price – improves.

Other managers will look for those companies generating significant revenue growth, reasoning that these are the companies likely to see the strongest share price growth. This could be companies supported by a strong secular change, such as online retail, or where a company has a new and innovative product, such as some parts of the technology market.

There are also managers that will specialise in a certain size of company – focusing on small, growing companies, or established blue chip companies. In general, growth managers will prioritise smaller companies, while more income-focused managers will prioritise the blue-chips.

Within the global sector, some managers will aim to find the right countries – where economic growth is strongest – and then find companies within that. Others will take a purely stock-picking approach, aiming to find the best global pharmaceutical company, say, and investing in that. Some managers will try and time the business cycle, moving into more economically sensitive companies as the business cycle is expanding, or more defensive companies in a recession. Others simply try to pick the best companies and hold them through the cycle.

Funds will also vary in the extent to which they follow an index. Some funds will aim to stick close to their benchmark index – usually the MSCI World index. This tends to leave them with a high weighting in the US, which is over 50% of the MSCI World market capitalisation. Others will be more ‘unconstrained’, and have the flexibility to move away from benchmark weightings.

Recent performance 

Over the past five years, the average fund in the Global sector has grown by 77.7% (to 12th February) and in the investment trust Global Smaller Companies sector by 917.4%. This compares to average growth from the Global Equity Income sector of 81.3%, and from the UK All Companies sector of 113%.

By far the best performing funds over the past one, three and five years have been those with a smaller companies bias, such as the Invesco Perpetual Global Smaller Companies fund or the Schroder Global Smaller Companies fund, though these funds will tend to suffer disproportionately when markets are trending lower. The top performing funds have also tended to have a concentrated, stock-picking approach, such as Rathbone Global Opportunities or Henderson Global Growth. The other top performers have been those focused on specific top-performing themes, such as global consumer funds, which have benefited from the rise in emerging market consumption.

The weakest funds have tended to be those focused on the resources sector, which have suffered from the slump in commodities markets. Those that have been highly exposed to emerging markets have also suffered.

When does the sector perform well/badly?

In general, growth companies will tend to perform better in an environment of buoyant economic growth. If companies and consumers have more money in their pockets it will tend to lead to stronger revenues for companies. Conversely, growth companies will do badly at times of weaker economic growth, because it becomes more difficult to generate profits. That said, managers within the Global sector tend to perform differently at different stages of the market cycle. Natural resources- focused managers will perform well when high global economic growth is creating demand for commodities, but will slide during recessionary times. A ‘value’ approach may do well when markets are cautious, but fare less well when they are exuberant.

What sort of investor does it suit?

A global fund will suit those investors who want to look outside their domestic market, but do not want to start selecting between Europe, or the US, or emerging markets. A global fund is likely to provide some exposure to a broad range of markets and sectors, and provide a ‘one-stop shop’ for an investor’s non-UK exposure. Investors must be willing to take risks beyond those of a conventional UK fund. Global funds come with currency risk, for example, and the underlying companies held by fund managers may not be as well-known. It will suit an investor who does not need an income from their investments, and has a relatively long (3-5 year) time horizon.

How much of a portfolio for low/mid/high risk investor?

The majority of investors will have UK growth and income funds, or multi-asset funds at the core of their portfolios. They may then look to global funds to provide diversification. Those willing to take more risk may have a higher exposure. That said, global equity funds offer a broad variety of options, with investors able to choose between higher risk smaller company funds and more defensive blue-chip equity funds.

Popular funds

Top 10 by performance (5 year) – Global sector

Invesco Perp Global Smaller Companies

McInroy & Wood Smaller Companies

Sanlam Global Financial

Schroder ISF Global Smaller Companies

Henderson Global Growth

Standard Life Investments Global Equity Unconstrained

MFS Meridian Global Concentrated

S&W Aubrey Global Conviction

Janus Global Research

Rathbone Global Opportunities

Questions investors should ask

– Do I want to be in large, blue-chip companies?

– Do I want a manager who incorporates a lot of macroeconomic analysis?

– Do I want a manager who invests in emerging markets?

– Am I happy to take more risk in a smaller cap or more flexible fund?

– Do I want a fund that will stick close to the index?

– Do I want to invest with a large fund group, or with a boutique group?

Comments from investor advisers

Damien Fahy, head of research,

“This is always an interesting sector offering a mix of different investment themes. Although sector returns have been strong over the last 6 months, their US bias in particular has served them well; given the US stock market’s strong returns in 2013 (the average Global fund has around a 40% exposure to US stocks).

“We like Standard Life Global Smaller Companies fund. The fund was launched in January 2012 and uses same tight quant-based investment process successfully employed by the manager in its successful stablemate, the UK Smaller Companies fund. While we ordinarily wouldn’t recommend a relatively new fund, the fund’s performance in 2013 (up 37.67%) indicates that the transition to a global mandate is going well.”

Patrick Connolly, financial planner, Chase de Vere

“The Global sector includes a wide range of funds that can have different strategies and objectives. The sector includes funds which will take big asset allocation bets and others that don’t, those that have some exposure in the UK and those that don’t and a splattering of specialist and ethical funds. This can cause confusion and makes it really important to fully understand how individual funds work and not to necessarily compare funds with others in the sector or with the sector as a whole. The major benefit of this sector is that investors can achieve a good level of diversification in global stock markets with a relatively small investment.”

 Connolly’s Fund recommendations: Aberdeen World Equity, Threadneedle Global Select

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