08 Mar 2019 Gatekeepers and the Global sector
Having led the retail sales figures all year, perhaps it was no surprise that the Global sector was overtaken by a mixed asset sector in Q418. Plummeting equity values served to remind investors that stuff goes down as well as up – despite years of outstanding growth, investors took to more hand-wringing than perhaps a three-month downturn warranted.
Global is the new black
The attractiveness of the Global sector over the years – and the withering of the UK All Companies equivalent – reflects investors and their advisers’ increasing desire to leave decisions on geographical allocation to the manager. However, the sector is a bit of a mixed bag.
The Investment Association requires that sector funds hold no less than 80% equities and to be regionally diverse. This allows mixed asset and thematic funds to rub shoulders and makes MSCI World benchmark comparisons less than straightforward. But most investors are simply looking for diverse exposure to the shares of a diverse range of global companies, rather than a thematic preference.
In the vanguard
The sector contains over 300 funds, 26 of which are passive. Vanguard’s representatives include the LifeStrategy 100% Equity fund which is gaining ground as a handy comparator for fund selectors to use when assessing active performance.
Over the quarter, 111 of 290 active funds beat the Vanguard fund. Vanguard’s most popular fund with selectors (11 picks), which mirrors the FTSE Developed World ex-UK index, underperformed both the sector and the MSCI World index, ironically because of its lack of UK exposure.
The most successful fund in the sector over Q418 is Morgan Stanley’s Emerging Markets Leaders fund. However, since it only invests in Emerging Markets, one wonders how it managed to qualify for the sector. The most successful qualifying funds followed the infrastructure theme.
Most cannot invest in infrastructure projects directly so buy companies whose revenues depend on those endeavours, e.g. construction, utilities, transport and energy. These stocks were resilient and had relatively low volatility over the quarter, with First State Global Listed Infrastructure fund (13 picks) being the top performer, delivering a positive return over the quarter, while having been in negative territory for much of the previous nine months. The theme that was least rewarding was Energy, with some funds suffering falls of almost 80%.
The second most popular fund with Gatekeepers, Standard Life Global Smaller Companies fund (20 picks), was as one might expect severely impacted by the downturn, falling by an eye-watering 61%. Smaller companies are generally most sensitive to wider market moves – however the fund had outperformed the sector by more than 15% over the previous 9 months and was still ahead of the sector average over the year, and in positive territory.
Performance v picks
The top Global funds by three-year alpha are shown below. Apart from a handful of industry favourites, the best performers are generally not on the industry’s radar. Heriot Global in fifth place, a fund by Scottish boutique and global equity specialist, Dundas Global Partners, has no gatekeeper picks at all. Fundsmith Equity is the fund with the most picks.
In contrast, in the table of global funds with the most gatekeepers’ picks, performance and picks are not necessarily correlated. Lindsell Train Global Equity is in ninth place with nine picks, despite outstanding performance.
Leaders of the pack
The two funds that have developed a real ‘brand’ leadership in the sector are Fundsmith Equity and Lindsell Train Global Equity. Perhaps surprisingly the latter appears on only nine lists, compared with 33 for Fundsmith. This might explain Terry Smith’s unwillingness to discount the price for Hargreaves Lansdown, versus Nick Train’s more accommodating stance.
Train’s fund ranked 25th of 316 funds, and investors suffered 7% less downside than Fundsmith, and 15% less than Vanguard Life Strategy. Indeed, over the year Train’s fund outperformed Smith’s by over 9%. We wouldn’t be surprised if the Lindsell Train Global Equity fund was increasingly favoured by gatekeepers in 2019.