Global funds have a tricky objective to pull off. They have to find some way of allocating their assets according to a certain formula, but with competing trends for their attention.
For example, if they were to follow the MSCI World Index very closely, then that would mean that about half the funds would be invested in North America, which some might feel uncomfortable with. In addition, deciding that emerging markets are the way forward might not be all that reasonable either, given the restrictions and potential pitfalls of direct investment.
Either way, their performance has not been exactly stellar in recent months. For the year to 19 March 2012, the mean global fund produced an average return of 10.38 per cent, against the MSCI World Index of 10.19 per cent. The FTSE All Share returned 9.25 per cent.
Ruli Viljoen, head of investment research of Morningstar/OBSR, said: “Last year the average global equity fund struggled to outperform the MSCI Global Index. The reason for that was because the US did really well and emerging markets was where most fund managers are overweight.
“For those managers that are underweight in the US, that had an impact. Most of them, most of the time are going to be underweight the US. That’s because the US is such a large allocation in the MSCI.
“Most managers are saying ‘I’m running a diversified portfolio, are half of my best ideas going to come from the US? Is that a well-balanced, diversified portfolio?’”
The problem is that the US is doing quite well at present. The S&P 500 has been climbing steadily in the past few months, so that it is now hitting 2008 levels. It is currently sitting at around 1400, a rise of 200 points from 2009, and its increase is starting to outpace that of the FTSE 100.
And more recently employment data has suggested that the economy is turning a corner. In February, the US added 227,000 jobs to the economy, following on from the 243,000 created in January.
This has been matched by strong figures on the unemployed. In the week to 10 March, initial jobless figures fell 14,000 to 351,000, and the numbers have been on a downward trend since October last year.
Richard Peirson, fund manager of Axa Framlington Managed Balanced fund, is optimistic about US-focused stocks. He said: “Although we’re not very overweight in the US, in the UK portfolio we have a reasonable bias towards companies with US earnings.
“One of the themes that will get increasing focus on is the reindustrialisation of the US, largely on the back of expansion of shale oil and shale gas, which will make the US virtually self-sufficient in energy, and reduce the costs of manufacturing.”
In addition, the birth rate is booming, he said. “The demographics are quite impressive. Birth rates are relatively high whereas most of the rest of the world, birth rates are negative.”
This will also have a positive impact on the US economy.
Attention
However, it is emerging markets that have been attracting a lot of attention, and where fund managers are hoping to get the most growth.
Ms Viljoen said: “Any fund that has a significant bias to emerging markets, has typically done really well. If you look at global funds pre-1996, you will see the MSCI World Index consistently outperformed the average funds because of the North American factor. In the last 10 years, the emerging markets have outperformed in that period.”
She thinks that this growth could continue to have a big impact on the constitution of the MSCI index. She said: “Ten years ago the emerging markets made up 4 per cent to 5 per cent of the index, now it’s 10 per cent of the index and that is definitely where the growth has been.
“In another 10 years’ time, you could go as far as to say the US weight will come down even more and emerging markets will go up.”
Mr Peirson is in agreement. He said: “I think emerging markets may have cooled down a bit, but if you look at the growth rates of the world, where is the growth going to be from? It is still three times the growth rate that the US is going to produce, the fastest growth is going to be from India, China and Latin America.”
So how are fund mangers approaching this area? Mr Peirson said: “We’re slightly underweight in emerging markets and Pacific. My approach in running this portfolio is to prefer to own companies that benefit from Asia business. I would rather own a unit that sells in India than a local Indian business.”
The biggest growth areas in emerging markets are consumer goods sectors, which are benefiting from the increase in prosperity. So, for example, Diageo is an important stock.
Many fund managers find it risky investing directly into an Asian or other emerging market stock, not least because of the challenges of owning stocks and doing due diligence.
For example, China has restrictions on foreign ownership of companies, so that investors have to buy ‘H’, or Hong Kong, shares.
Perry Winfield, portfolio manager and co-manager of Global Opportunities fund of First State, said: “China and India are very significant either through direct investment or through the impact on the world economy. For us it’s very much about finding the right company at an attractive valuation.”
However, given the nature of the world economy, this might very well mean buying into international companies that benefit from the growth in emerging markets. Mr Winfield said: “Global trade is doing very well, why not buy FedEx in Germany?”
The general trend is rather than decide on which areas are looking popular, to pick stocks that benefit from certain sectors, with more fund managers taking a bottom-up approach than a top-down aspect.
When it comes to selecting stocks, Mr Winfield said: “Is it operating in new markets. We pay a lot of attention to management and its sustainability. If the end market is starting to grow, then it makes a company that we like much more interesting. If we like its competitive position, and it’s gaining market share, it becomes a more attractive proposition for us.”
One area that is catching his eye is Japan. Despite being in a recession for 10 years, there is a lot of promise. He said: “It has got some world class expertise like Toyota. The Japanese yen had been getting stronger and stronger in the early 2000s, and that’s made it more difficult for companies to compete.”
However, it has become apparent that Japan has some serious problems, and as a result the yen has been getting weaker since 2009. Toyota, said Mr Winfield, has been cutting costs just to keep pace with the historically strong currency. Now that the yen has been weakening, Toyota is in a good position to take advantage of that and perhaps improve its prospects.
Mr Winfield said: “We think Toyota is one of the best companies in the world.”
Overall, global funds have to decide how heavily to focus on emerging markets and the US, and decide how to approach each sector.
Predicting which companies will most benefit from the rapidly growing emerging markets economies is one of the challenges fund managers face. Working out how to get the balance right between continents is another.
Melanie Tringham is features editor of Financial Adviser
