The past five years has seen significant dip in the performance of the average global portfolio relative to those exposed to the UK, raising the question as to whether investors need bother with globally diversified funds.
FE Analytics data shows that in the past five years to 4 September 2013, the IMA UK All Companies sector has outshone the IMA Global sector, delivering an average 54.28 per cent return compared with just 38.54 per cent. This is despite the global economy far outperforming a sluggish UK recovery that has lagged most major global markets.
While this appears counter intuitive, the solution to the riddle perhaps lies in the fact that while the FTSE 100 may well be made up of UK companies, it is a thoroughly global market. Analysts from BNP Paribas estimate that 80 per cent of all earnings of companies in the benchmark index are gained from outside of the UK.
Moreover, with the UK’s economic recovery well under way investors can benefit from the improved sentiment in these businesses’ domestic market as well as the global demographic changes they are exposed to.
Stephen Walker, head of equities research and market strategy at Ashcourt Rowan, explains: “One potential positive for the UK is that it appears likely to continue to punch above its weight on the world stage and the size of the economy encourages British companies to have a very global mindset.
“This leads us into one of our key approaches to emerging markets which is that you don’t have to directly invest there in order to benefit from this ‘super trend’. Companies both large and small in the UK offer a route in to a wide variety of countries worldwide and the UK stockmarket really can be seen as a microcosm of the world.”
Mr Walker adds that the UK offers world-leading consumer goods companies with brands that are considered ‘desirable’ by the rising affluent middle classes in emerging markets such as China and India.
Global cache pays dividends
Fidelity’s Global Consumer Industries fund manager Nicola Stafford agrees that the global consumption theme is an extremely powerful investment strategy over time because of the strong year-on-year returns that leading consumer brands can deliver.
She says: “These companies trade on the established and respected brands they market and sell globally, creating barriers to entry and generating long-term sustainable earnings. They tend to be higher-quality, more cash-generative companies compared to the overall market.
“This is partly because brands like... Johnny Walker (Diageo) and Lucky Strike (British American Tobacco) enjoy established brand loyalty in developed markets and are aspirational brands in emerging markets.
“Leading global consumer brands are powerful assets because they create high barriers to entry. They also generate more stable revenue streams and more consistent earnings growth.”
Mr Walker also suggests that UK franchises with strong technology and research and development underpinnings are well placed to benefit from this shift in spending power from west to east.