Introduction
Net retail sales for the Investment Association Global sector have been patchy, with the category recording three months of outflows and just five months where inflows exceeded £100m. This compares unfavourably with its Global Equity Income peer group, which proved more robust in providing positive monthly inflows across the year.
But with 2016 getting off to an equally rocky start, is the picture about to change for global equity investors?
Invesco Perpetual chief investment officer Nick Mustoe notes that for 2015 and into this year, the focus has been on buying safety. “The sectors that are perceived to have more defensive qualities – consumer staples, healthcare and consumer discretionary – have performed the best. Materials and anything that is seen as cyclical have performed poorly,” he says. But he points out that these areas are increasingly where the opportunities are, “because you can buy a number of businesses that are very high-quality on very low valuations”.
That said, he acknowledges: “In the immediate term most investors don’t want to do that, and so the defensive consumer areas have become very much the crowded trade.”
In spite of this, Lewis Grant, senior portfolio manager of the Hermes Global Equity fund, points out defensive stocks “can provide a haven of resilience in particularly choppy markets”.
He says: “Within traditionally defensive pockets of the market we are focusing on companies that can deliver through the cycle, with the potential to achieve strong relative performance in a downturn, but which still offer enough upside to form long-term core holdings if this slump proves short-lived.”
While there has been significant global market volatility, there has still been a small number of popular firms that have performed well, particularly in the US in the form of the Fang stocks – Facebook, Amazon, Netflix and Google. But is there any value left?
Mr Mustoe notes: “[The Fangs are] fantastic businesses, but they’re trading on high valuations, with very high expectations. My view is the opportunity is outside of this narrow range of stocks, and to look at sectors that offer good characteristics.” He highlights opportunities in pharmaceuticals and tobacco, which “still trade on sensible valuations and look very interesting”.
“But the banking sector is a classic opportunity. The very well-capitalised major banks, particularly in Europe, have been through a six-year rehabilitation. They’ve restored their balance-sheet quality and strength with strong Tier 1 capital ratios. They’re typically trading at book value or less, and they all have typically good dividend yields and the prospect of good dividend growth.”
Meanwhile, BlackRock global chief investment strategist Russ Koesterich suggests that while markets remain volatile, given the lack of evidence of a more pronounced global economic slowdown, “the recent selling looks overdone”.
He points out that this could result in some bargains, though “most developed equity markets are still far from cheap”. He points to Japanese equities as a market offering relative value, along with US financial stocks.
THE PICKS
Fundsmith Equity
Managed by Terry Smith, this £4.3bn fund was launched in November 2010 with the specified approach of being a long-term investor in its chosen stocks and not adopting short-term trading strategies. It selects businesses based on a range of criteria, including those that are resilient to change, particularly technical innovation, and firms whose advantages “are difficult to replicate”. For the five years to January 25 the fund has delivered 111 per cent against the IA Global sector average of 26.1 per cent. Its top-10 holdings include Microsoft, Imperial Tobacco and Pepsico.
Schroder Global Healthcare
This £235m fund, which launched in May 2000, is one of the more focused global offerings. Run by John Bowler, the vehicle aims to achieve capital growth by investing in healthcare, medical services and related products, and global companies. For the 10 years to January 25, the fund is ranked third across the IA and AIC Global sector constituents with a return of 188 per cent against the IA Global sector average of 58 per cent. Its top 10 holdings include heavyweights such as Pfizer, Johnson & Johnson and GlaxoSmithKline.
EDITOR’S PICK
Henderson Global Growth
A member of the IA 100 Club for two years running, this £381m fund is managed by Ian Warmerdam. It has the aim of achieving above-average, long-term capital growth by investing primarily in a concentrated portfolio of global stocks “with a bias to those securities where innovation drives competitive advantage”, and where the manager considers them to be underappreciated and offer sustainably high levels of growth. The fund is top quartile across the combined IA and AIC Global sectors, with its five year return of 56.1 per cent comfortably outperforming its IA peer group sector average of 26.1 per cent. The fund’s largest geographical weighting is to North America at 54.9 per cent of the portfolio, while the top 10 holdings include Apple, Amazon.com and Rightmove.
