Fund briefing: Global equities
There are potential problems everywhere, with the prospect of rising US interest rates, question marks over the Chinese economy’s strength and looming concerns such as Britain’s possible exit from the European Union.
This is why it makes sense to take a diversified approach to global equities because you are spreading your risk across regions and countries. “Most UK investors are heavily weighted towards the UK, so rely on the home economy and stock market doing well,” says Darius McDermott, managing director of Chelsea Financial Services. “It also means they have more in oil, mining and banks than they might like, as the UK market is skewed towards these areas. “If you invest abroad, you will have a wider range of companies and sectors to invest in,” he says. “Why limit yourself to the UK when there are some excellent firms in other countries?”
Patrick Connolly, a certified financial planner at Chase de Vere, suggests investors should aim for exposure to the major economic areas, such as the US, UK and Europe, where the world’s best companies are listed.
“It makes sense for investors to have most of their international exposure in Western markets as these tend to be less volatile,” he says. “However, they shouldn’t ignore the long-term growth potential from Asia and the emerging markets.”
Investors can achieve exposure to global equities via one-stop-shop global funds or through a mix of equity funds focusing on specific regions or countries. “All-in-one global equity funds allow investors to achieve a good level of diversification with a relatively small investment,” adds Mr Connolly. “This is ideal for those who haven’t enough money to diversify through individual regional funds.”
Active funds are closely run by a dedicated manager who aims to beat a benchmark stock market index such as the MSCI World Index, which tracks performance of more than 1,600 companies in 23 developed markets. However, active managers don’t always beat the index – in fact, sometimes they underperform.
So it’s also worth considering passive or tracker funds, which aim simply to replicate performance of a stock market index such as the MSCI World index previously mentioned or the S&P 500 index, an American stock market index based on the market capitalisations of 500 large companies having common stock listed on the NYSE or NASDAQ.
The benefit of a passive approach is your return should be in line with the broader market. If it goes up 10%, then your investment rises – but if it falls, you will also suffer.
Justin Modray, founder of Candid Financial Advice, uses both styles. “If we could pick an active manager who we were confident would beat the index every year, we’d use them all the time but they don’t really exist so we combine trackers with active managers who are doing something different,” he says.
In this way he’s spreading his risk. “Betting your shirt on one or the other is quite a dangerous strategy,” he says.“Provided that we pick active managers who are not closet trackers, combining approaches is a sensible split.”
Having a broad range of exposures is particularly useful given the fact global markets are so challenging, according to James Thomson, the experienced manager of Rathbone Global Opportunities fund.
He believes it will be a tricky year for equity markets – especially for growth investors who prefer to buy companies that are set to expand over the years. “People are really sceptical about the economy, so the overall market feels fragile,” he says. “We are flush with ideas, but the macro backdrop is undoubtedly more uncertain and investor sentiment is just dreadful.”
A key concern is that many areas that have proved popular with investors this year, such as mining, oil and gas, and the UK supermarkets, are being bought because they have slumped to attractively low valuations.
“It’s a laundry list of prior year disappointments as investors are buying earnings uncertainty,” he says. “However, they will come back to embracing quality growth companies that are shaking up their industries and doing things differently.”
Another option is to select a fund whose manager takes a flexible approach to investment style. Different styles include ‘top-down’, choosing assets based on a big theme, or ‘contrarian’, choosing assets that are out of favour.
Ian Heslop, co-manager of the Old Mutual Global Equity fund, embraces whichever investment style is likely to perform well in the current environment. “We make most of our returns from having the right styles present at the right time, but don’t concentrate the portfolio in one particular style or continue holding it regardless of whether or not it’s in favour,” he explains.
Mr McDermott suggests investors consider combining a number of different portfolios, pointing out that many funds in the IA Global sector are highly exposed to developed markets. “If you want exposure to emerging markets or Asia, you may have to search in other sectors to fund it. Look for specialists in each area and remember the key is to know what the fund is investing in before you pick it,” he says.
Fund to watch
This fund, which is managed by an investment team led by Justin Abercrombie, aims to achieve the optimum overall return of capital and income through flexible global investment management and will invest in equities quoted on recognisable stock exchanges.
This is a very diversified fund that invests in hundreds of stocks – currently it has more than 700 holdings – out of the 15,000-strong investment universe that the team analyses to find attractive opportunities.
At present, the fund, which was launched 16 years ago, has 61% of its assets in the Americas, 24% in Europe, 12% in Asia, and 2% in Oceania, according to its latest fact sheet.
As far as sectors are concerned, the highest allocation is to financials (18%), followed by information technology (16%) and health care (15%). Meanwhile, the largest stock positions are Apple, Microsoft, Alphabet and Exxon Mobil. Other household names in its top 10 holdings are Johnson & Johnson, Wells Fargo, JPMorgan Chase, Nestle, Pfizer and Procter & Gamble.
Patrick Connolly, a certified financial planner with Chase de Vere, is a fan. “It takes an institutional approach to risk management, sticking to a very structured investment process and being heavily benchmarked to the MSCI World Index,” he says. “It has a low charge of just 0.4% per annum and aims to achieve marginal incremental outperformance from the index, which to date it has mostly done.”
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.