Can global funds stave off problems to sustain growth?

  • Grasp the factors affecting global equity fund performance
  • Understand the political impact
  • Learn more about where global equity fund managers are investing
Can global funds stave off problems to sustain growth?

Global equity funds have been largely unfazed by ongoing political uncertainty over the past 12 months, with a number of stockmarkets shrugging off the unstable backdrop and continuing to post healthy returns.

For UK investors, instability at home has only served to increase the attraction of going global. In 2016, the pound’s fall gave a double-digit boost to returns denominated in other currencies, including those produced by global funds. 

While there remains a tradition of home bias among UK investors, June’s surprising general election results might mean more investors look to increase their global exposure. 

The trend has already been evident over the past year: during this period retail investors have redeemed £3.5bn from the UK All Companies sector, but have ploughed £3bn into the IA Global sector, according to figures from the Investment Association.

This suggests that political risk may in fact be favouring global equity funds, as investors grow nervous over Brexit negotiations or domestic equity valuations, but also seek to shy away from taking too much individual country risk.

However, despite the popularity of global equities, fund managers around the world are growing increasingly wary about equities as an asset class – mostly owing not to political risks or even central bank policy, but a rather more fundamental concern.

The most recent Bank of America Merrill Lynch Global Fund Manager Survey, for example, shows that a record number of fund managers – 44 per cent, up from 37 per cent in June – consider equities to be overvalued. But while this finding paints a rather dismal picture, 40 per cent of those surveyed are were still overweight equities compared to other assets. This arguably indicates the lack of viable alternatives for investors.

Therefore, rather than ruling out equities altogether, it may now be more important for investors to consider which regions are still offering value. Emerging markets and Europe have been the most popular areas in 2017, but a generalist approach should also be considered.

Defining global

One of the biggest groupings in the IA universe, the Global sector is home to funds that invest a minimum of 80 per cent of assets in equities listed outside the UK. Funds under management for the sector, according to the Investment Association, stand at £88.3bn.

The IA sector definition notes that the focus of global funds is to diversify according to geographic region. 

The sector is also home to funds focusing on a range of investment styles and themes, and specialist products such as healthcare and energy portfolios are not uncommon.

The top 20 Global funds and trusts as featured in Table 1, demonstrate the best performers over the past five years. 

It is little surprise that Fundsmith Equity, a long-time favourite among investors for consistently producing top-quartile returns, is among those leading the way. 

Managed by Terry Smith, the fund is in essence a thematic portfolio. It focuses on global brands, companies with a dominant position in a market operating with high barriers to entry.