Knowledge is key for regional funds

This article is part of
Global Opportunities - November 2014

The benefits of a diversified portfolio are often quoted within the investment world, and for the most part this maxim has proved true.

But sometimes there are exceptions, and one of those is when investors are looking at certain geographical locations.

In theory, a global portfolio delivers the best of all worlds as the flexibility means they can invest in different regions. Hence those that are outperforming offset the detractors, resulting in a steady and positive investment return.

Article continues after advert

The downside of this is that in a global portfolio where one region is dominating the markets and producing stellar returns, a global offering can only benefit from part of that rise rather than the whole.

For example, looking at the IMA Global sector versus different regions for the year to date to November 14 2014, the broader opportunity set found in the global funds has performed better than certain regions, with an average return of 6.48 per cent. These include the IMA Global Emerging Markets sector, the IMA Japan sector, as well as the IMA UK All Companies and IMA Europe excluding UK sectors.

But while these regions have lagged behind their global peers, for various reasons, the IMA North America, IMA Asia Pacific excluding Japan and the IMA China/Greater China sectors have all outstripped the IMA Global sector. In fact, the IMA North America sector’s average return is more than double the global average at 14.96 per cent, according to FE Analytics.

The danger with pursuing a single-region strategy over a more global portfolio is the specific country risk, particularly in terms of economic and geopolitical risk as demonstrated by Russia, Japan and the eurozone so far this year.

Pat Ryan, manager of the Lazard Global Equity Income fund, points out the positives of a single-country or region fund is that the manager would have a much deeper knowledge of the individual companies within that market.

He explains: “It’s a kind of a trade-off between richness and reach. A global fund has great reach in that it has broad exposure to 6,000 potential opportunities in the global market, but you’d think a manager focusing on a single market would have a richer knowledge base on that country and perhaps that shows through in stock selection.

“We feel it is good to give the manager as much flexibility as possible and have it be as unconstrained as possible. When you have the full opportunity set you can rotate capital among the different regions based upon fundamentals versus valuation, and we think you’re better off with the full global opportunity set.

“The way our model works is we have people running individual country and regional funds and we leverage off them. We have the best of all worlds.”

John Ventre, portfolio manager of the Old Mutual Spectrum funds at Old Mutual Global Investors, agrees that global funds have certain advantages in being able to pick the most attractive business in whatever sector, irrespective of where they sit geographically.