What do you expect from a global equity fund? Geographical diversification? For an alarming number of these funds, that simply is not the case.
Passive fund provider Vanguard offers a global fund as part of its low-cost LifeStrategy range that has 42% invested in the US and 25% in the UK. While investors are sure to be pleased with the 0.24% annual charge, those expecting equal geographical weighting may be disappointed.
Vanguard say that their research reveals investors in every country have historically displayed a significant bias towards their home markets.
“Investor preferences and bias towards domestic markets must be weighed against the relative advantages of global diversification,” a spokesman said.
“Vanguard believes these allocations represent a reasonable trade-off between investor preferences and ensuring that investors gain exposure the potential of global investing.”
Vanguard, of course, do not have to stock select – their decisions when investing globally stop after the asset allocation has been made. But one of the difficulties when actively investing globally is the sheer volume of stocks to choose from.
Mark Dampier of stockbrokers Hargreaves Lansdown says this is why so many global funds fail to impress – when faced with so much choice, many fund managers fail to deliver consistent returns.
“It is a disappointing sector, global equity,” he said. “Unless you adopt a particular style – such as Terry Smith favouring megacaps at Fundsmith, or Nick Train’s high conviction style – the volume of stocks to choose from can provide plenty of pitfalls.”
Smith adopts a strict screening process which favours developed market equities with strong balance sheets and global revenue streams – the fund is Morningstar Analyst Bronze Rated, but it is 63% invested in the US market, and 21% invested in the UK.
Artemis Global Income is among the more equally divided funds, with a third in Europe, another third in North America and 20% in the Asia-Pacific region. Bronze Rated manager Jacob de Tusch Lec also invests small allocations to uncorrelated countries such as New Zealand and Israel.
“Global investing gives you built in diversification; investing in different business cycles, currencies and economies mitigates risk,” he said. “There are plenty of companies that I could double my investment in based solely on the strength of their balance sheet, but I have to ask myself do I want 4% in South Africa when I know it is so sensitive as a stock market to emerging market volatility.”
Different regions offer fund managers different opportunities – Europe has cheap stocks and attractive dividends, the US a strong economic backdrop and emerging markets the best opportunities for growth.
Jupiter Merlin Worldwide is Gold Rated fund of funds, with a significant weighting in the US at 46% but the rest of the portfolio is well spread out with exposure to peripheral Europe, Japan, Australia and Latin America.
Veritas Global Focus is also Gold Rated, with a very strong management team and has a similarly weighty allocation to the US of 51%. The rest of the fund is predominantly in developed economies – the UK, Europe, Australia and developed Asian markets.
While these funds are no doubt at the top of their game, for investors who already have a large allocation to the US – perhaps in a single country fund or ETF – they would not be ideal. In order to avoid this overlap, and reduce risk within their portfolios investors must not be guilty of inertia.
Using a portfolio X-Ray tool to monitor your regional exposure can help, but investors must also be sure to check the underlying portfolio of all investments before buying them – whether active or passive.
