Global equities give active managers a broad, deep pool of stock in which to manoeuvre. One would think, therefore, that they could showcase their abilities reasonably well here. Sadly, most have not done so. The record of futility is striking. Looking at the oldest share classes of funds in the Morningstar Global Large-Cap Blend category we see that as of May 31, 90% of the peer group lagged MSCI World over 10 years, 92% lagged the index over five years, and 89% lost to the index over three years.
Over the past 10 years, US stocks have surged ahead, whilst European issues have sagged
The Morningstar category includes funds from across Europe, irrespective of whether they are available in the UK or not. This gives us a large number of offerings to compare, but as cross-border funds in particular tend to be costlier than UK domiciled offerings, it’s worth seeing how UK domiciled offerings fared.
The short answer: Better, but only just. Over three, five and 10 years, 86%, 88%, and 84% of UK domiciled funds in the category, respectively, lost to the MSCI World index.
The conclusion is that over the past decade, the vast majority of investors in Global Large-Cap Blend funds have paid fat active management fees for the pain of losing to an unmanaged index. I’m also rather generously only looking at live funds, i.e., those that have had enough success at some point to survive. The inclusion of funds shut down by the groups would very likely bias the results downward still further.
There are some mitigating factors. Over the past 10 years, US stocks have surged ahead, whilst European issues have sagged. However, the gap has inflated dramatically since the 2011 crash. From September 2011 through May 2016, MSCI USA has risen 84% in US dollar terms, compared to 22% for MSCI World ex USA and 27% for MSCI Europe.
That relative appreciation has caused the US to loom large in the MSCI World index; it now makes up more nearly 60% of that benchmark. Managers in the Global Large-Cap Blend category have, for the most part, declined to ramp their exposures up to the same extent. Instead, they have over-weighted Europe. As of their most recent portfolios, 75% of managers are at above the index weight in Europe, while just 13% are at or above the index weight in the US.
One can see their point of view—it’s very hard for managers to add value picking US large-cap stocks, and it’s tempting to bet more on areas closer to home. One might also generously assume that some managers are favouring Europe on valuation grounds.
So, What are Investors to Do?
Morningstar has three Gold rated funds in the Global Large-Cap Blend sector. One of them is a passive, Vanguard FTSE Developed World ex UK. At a mere 0.15% per year in ongoing charges, it’s extremely cheap, and offers broad exposure to global markets, although investors should note they will need to get their UK exposure elsewhere and like the MSCI World, the index the fund tracks is heavily tilted towards US issues.
For those in search of active ideas, our analysts have awarded a Gold rating to just two actively managed funds in the category, one has a 10-year record: Veritas Global Focus. The offering is run by managers Charles Richardson and Andrew Headley with a benchmark-agnostic approach focused on companies with durable competitive advantages and strong cash flows, to very good effect. The fund’s A USD shares have bested MSCI World by 3.2 percentage points per annum over the past 10 years. The other Gold-Rated offerings is Dodge & Cox Worldwide Global Stock, a newer offering here that is based on a pair of successful US and ex US strategies the firm has run for decades in America. The fund seeks value when buying shares and is patently unafraid to go into beaten-down names.
The team do meticulous research and are willing to stick with their picks for the long-term, with turnover typically below 20%. The Veritas and Dodge & Cox offerings have in common that they are willing to back their ideas with meaningful portfolio concentrations based on fundamental research. As such, investors should know they will underperform at times, but over the long haul, our analysts believe they can add value for investors in a category where that ability seems exceedingly rare.
