Darius McDermott, managing director, FundCalibre, considers whether taking a global approach could be the simple answer we need to investment uncertainty
What’s the biggest risk to investors and the wider investment industry? To me, the answer is simple: the latter has a penchant for overcomplicating things, often to the detriment of the former.
Take this year for example. To steal the words of our late Queen, it has been something of an annus horribilis for investors as inflation, geopolitical concerns and, latterly, the threat of recession, have dominated markets.
I remember reading an article from Ruffer, which highlighted that in the first quarter of this year – the best-case scenario for a stock and bonds investor was a loss of 4.5 per cent from high yield bonds*. Every asset class fell, there was nowhere to hide. Interestingly, this was the first time this had happened since 1990.
At the time of writing, the UK is currently in a malaise courtesy of the Government’s ‘mini’-budget – a move which has de-stabilised Sterling, the mortgage market, and pensions. The outlook appears so murky, that you could forgive investors looking high and low across asset classes for a position of safety.
But perhaps the obvious answer is staring us in the face: diversification. This brings me to global equities, which are often seen as a one-stop shop for investors who don’t want to have to worry about deciding geographical allocations in their portfolios. With more than 41,000 stocks listed on stock exchanges worldwide**, the opportunity is both vast and complicated – making it the ideal place for an active manager to flourish – and if active managers ever wanted to prove their worth, now is the time.
When it comes to the global approach – the proof is in the pudding. Research from Vanguard found that volatility within an investor’s portfolio was reduced with a 35 and 55 per cent allocation to international equities – yet there remains a strong demand from investors to stay tied to their home market***. This has its issues. I’d be less than happy to have purely invested in the FTSE 100 for the past decade or so and missed out on those big gains from some the tech behemoths in the US.
Many true active managers will not pay any attention to the benchmark and will simply invest where they find the best opportunities, regardless of where a company is listed. At times this could mean an even larger weighting to the US – something global investors must be wary of.
The MSCI World, which captures large and mid-cap representation across 23 developed markets has just shy of 70 per cent allocated to the US****. 6.2 per cent is in Japanese companies, 4.2 per cent in the UK, 3 per cent in France, 3.5 per cent in Canada and 13.5 per cent in the rest of the world****.
There are so many ways to approach a sector with over 300 funds to choose from. Our starting point tends to be which investment style we favour, but we also focus on how much exposure we want to US equities; whether the best value is to be found further down the market cap and income exposure.
There are other drawbacks – currency hedging can work for and against you in a global portfolio (unfortunately it is the latter following the ‘mini’-budget), while there is also an argument that many companies in each home market (take the UK for example) are already multinational in nature – therefore you are already getting that global exposure.
Year-to-date global equities are down 8 per cent^, but I’d expect further falls as we head into a global recession. Ultimately, I think this sector is likely to form the bedrock of an investor’s portfolio on the other side. There will be lots of opportunities for high conviction managers to tap into great companies at attractive valuations.
Core – JOHCM Global Opportunities
Managed by Ben Leyland, this fund has a strong bias towards larger and medium-sized multi-national businesses.With a philosophy of ‘heads we win, tails we don’t lose too much’, the fund can also hold large cash positions if valuations appear unattractive.
High Conviction – Brown Advisory Global Leaders
This 30-40 stock portfolio targets companies with a dominant market position and either a 20 per cent return on invested capital or a pathway to it within five years. Company management must demonstrate that is has allocated capital skilfully and ethically in the past, while valuations must also be appealing.
Small-cap approach – Baillie Gifford Global Discovery
Manager Douglas Brodie focuses on businesses which are highly innovative and capable of changing the world in some way; this means the fund tends to have significant weightings in the technology and healthcare sectors. As such, it is positioned very differently from its peers and can be more volatile, so is not for the faint-hearted.
Pros
- Takes money out of sterling and diversifies investments across the globe
- Global stock markets have fallen significantly, making valuations attractive
- A global fund gives a manager freedom, particularly with a high conviction approach
Cons
- Sterling has weakened so you are not getting as much for your money/may lose out if the pound rallies
- Dominated by US equities, which is still a relatively expensive market
- It’s a huge universe to cover – a manager’s style could be out of favour for periods of time
*Source: Ruffer: Nowhere to Hide – May 2022
**Source: Fidelity.com
***Source: Vanguard – Global Equity Investing: The benefits of diversification and sizing your allocation
****Source: MSCI World Index, 31 August 2022
^Source: FE fundinfo, figures in pounds sterling for MSCI World, 31 December 2021 to 29 September 2022
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
This article was first published in the November 2022 issue of Professional Paraplanner.
