First State Investments has branded the performance of two of its global equity funds “regrettable” in a letter to clients.
The £33.7m First State Worldwide Equity and £30m First State Worldwide Leaders funds both lagged behind their peer group averages and the MSCI AC World index return in 2015.
The index rose by 10.6 per cent and the average fund in the IA Global sector generated a return of 7.1 per cent, but the Worldwide Leaders fund delivered 5.6 per cent and Worldwide Equity returned 3.7 per cent.
Looking back on the past 12 months, First State’s Jonathan Asante, who co-manages both funds, said the funds had “lagged rising markets this year for a number of reasons”.
He cited the funds’ low exposure to the US relative to their index as a reason for the poor performance.
The MSCI AC World index has more than 50 per cent in the US whereas Mr Asante’s funds have around 25 per cent, less than half the index weight.
Given that the US was one of the best-performing markets in 2014, the relative underweight in the Worldwide funds caused them to underperform.
Instead of the US, Mr Asante’s funds had a lot of exposure to emerging markets, either through companies listed there or companies generating a high proportion of profits in the region.
But Mr Asante said these stocks had suffered in 2014 because in most emerging markets, “currencies were mainly weak, hindered [the stocks] from rising strongly”.
The high weighting in cash also dragged on the funds’ performance, given that global markets rose in 2014. The Worldwide Equity fund currently holds 8.1 per cent in cash while the Leaders fund has double that.
Finally, he said the funds had missed out due to a lack of exposure to technology and internet companies, which “became increasingly popular as the year progressed”.
The problems on the First State global equity funds have mirrored those on rival Aberdeen’s global equity products, which suffered a torrid 2014 due to owning few US-based or technology stocks and piling into emerging markets.
Like Aberdeen, Mr Asante said First State would not change its approach in response to the underperformance.
In a letter to shareholders, he said: “Lagging US-led markets is regrettable and we certainly do not aim to make excuses for it in this letter.
“What we can say is that we are maintaining the approach to both grow and protect clients’ capital for the longer term.
“Philosophically our approach has changed very little over the years and has been proven by our other funds’ track records. We hope to be able to prove its worth in tough markets for our Worldwide funds.”
Mr Asante suggested that the euphoria over some US-listed companies was akin to that seen in Brazil in 2009 following a huge rally that many thought would continue in spite of the expensive state of the market.
But since the end of 2009, the Brazilian market has fallen by 50 per cent and Mr Asante said: “We wonder if current sentiment around many US-listed companies will have been equally optimistic looking back in five years’ time.”
