Global equity funds attracted £7.7bn of net inflows in 2019, according to Last Word Research. To put this into context, UK equities amassed £45m as investors opted for the safety of international funds against a backdrop of political and economic uncertainty at home.
However, as investors breathed a sigh of relief following December’s general election result, is investing so much globally still a good strategy in 2020 and beyond?
Ben Yearsley, investment consultant at Fairview Investing, does not anticipate changing his allocation to global funds over the coming year. “One of the reasons for leaving the allocation alone is the relative value in the UK market,” he says. “It’s still one of the cheapest globally and with political certainty I think it will do well.
“Turning to global equities, where possible I have switched funds to hedged share classes, to take out some currency movements from overall returns.
“The pound does look cheap on many measures and it is a headwind to future returns if it rises. Hedged share classes are not widely available, though. Mainly Japanese funds offer them but also a few US, European and global ones.”
Within his global allocation, Yearsley says while he doesn’t underestimate the power of US markets, he sees better value in Japan, Asia and emerging markets.
“Not withstanding the coronavirus outbreak, which will affect short-term GDP, these areas remain cheap with good long-term growth prospects,” he says. “I will be adding into these areas, mainly at the expense of the US. Great long-term growth prospects allied to cheap prices is an ideal combination for longer-term investors.”
Counting the costs
Justin Onuekwusi (pictured), LGIM fund manager and head of retail multi-asset funds, says global equity funds that track the FTSE All World or MSCI ACWI offer exposure to over 2,000 constituents at a fraction of the cost of their active equivalents. However, many investors are not aware of the concentration conundrum they now face.
“US companies dominate the global index,” he says. “The ‘big five’ US stocks in the global index – Alphabet, Amazon, Apple, Facebook and Microsoft – have a higher weight than the whole of Japan, and also higher than Germany, France and Switzerland combined.
“The whole of the UK is just half of the weight of these five tech giants. This level of stock-specific risk has made the underlying index more sensitive to the newsflow on these largest companies.”
Onuekwusi adds dissecting the performance of US equities reveals that, at extreme periods such as the first half of 2018, the ‘big five’ explained almost 90% of the S&P 500 return.
“The remaining 495 companies were a sideshow. This is not the ‘well-diversified’ and ‘balanced’ exposure many investors in index trackers look for. Indeed, investors face a concentration conundrum yet index trackers continue to grow and are vital for investors to get cost-effective exposure.
“Instead of investing blindly in a global equity index, using regional equity to spread risk across geographies can help avoid excessive concentration or stock-specific risk yet remain cost-effective.”
All eyes on Asia and GEMs
Ryan Hughes, head active portfolios at AJ Bell Investments, says his firm has reappraised its global allocation split after strong performance from equity markets.
“During the past two years, Asia and emerging markets have lagged behind most other regions, while their long-term growth prospects remain strong,” he says.
“Short-term headwinds such as coronavirus make investors nervous but the long-term structural drivers of growth in these areas remain, as the local economies evolve and domestic consumption increases with economic growth.”
As a result, Hughes has upped his allocation to Asia and emerging markets across all the firm’s growth portfolios by 4-6%. “Weightings for Schroder Asian Alpha Plus and JPM Emerging Markets Income have all increased,” he says.
He adds: “We also made our first dedicated allocation to China A-shares, given expected long-term growth of the market. This is being funded by a reduction in exposure to Japan, which continues to face long-term structural headwinds.
“In addition, we have made a small reduction to UK equities, particularly in the mid-cap space. This followed a significant rally at the end of 2019 on the back of Brexit certainty, which may unwind this year should EU trade talks falter.”
