finding the right niche

The global and global equity income sectors are increasingly popular with investors looking to diversify from the domestic market. But performance can vary greatly, with funds taking a thematic or niche approach often being the winners.

finding the right niche


For investors seeking a quick and easy way to diversify equity exposure, global funds are an obvious solution, being able to comb the world for opportunities.

But the IMA’s Global sector is hardly the easiest to navigate: of 192 funds with a three-year track record (up to 5 Oct), performance ranges from a 50% gain to a 58% loss.

Such disparity comes from the range of mandates being lumped together in one peer group: alongside broad and focused global equity portfolios sit funds investing in sectors from Reits to infrastructure.

Global picks from Hargreaves Lansdown highlight the nature of the sector. Of 12 funds in the group’s Wealth 150, only six are traditional global equity products; the others focus on areas including smaller companies, resources, listed frastructure and ethical. All this spread of risk and return means careful analysis is needed before investing.

Top performers

Looking at the top performers over three years, a clear trend is the prevalence of more thematic offerings, with consumer, healthcare and
financial vehicles all present.

Among the strongest funds is Investec Global Franchise, which recently launched a UK version of its successful offshore portfolio. Manager Clyde Rossouw is grounded in the view that relatively few companies can consistently and reliably compound shareholder wealth at superior rates of return over the long term.

“Dominant intangible assets such as high customer loyalty, brands, patents, licences, copyrights and distribution networks can be difficult to create and even more difficult for competitors to duplicate,” he says.

Rossouw’s portfolio is over 50% skewed to the consumer sector, with a third in the US – although this is a large underweight against the MSCI World – and the UK as the largest active overweight. Holdings include Japan Tobacco, Microsoft and Nestlé.

While the emerging markets weighting is small, Rossouw says the country of listing is increasingly unimportant as companies generate sales globally.

Overall, one of the sector’s best three-year performers – regardless of Morningstar rating – is Henderson Global Growth. Again, this portfolio is currently riding high on a strong backdrop for its sector, with co-manager Stuart O’Gorman noting technology’s ongoing evolution and appeal.

Following this thematic trend, it is worth noting many of the poorer performers over three years are energy funds, hit by the ongoing disconnect between company performance and strong commodity prices. Even among more traditional global equity products, there are many contrasting approaches at work and therefore very different risk/return profiles.

Another strong performer, Rathbone Global Opportunities, is a high-conviction stock-picking fund seeking out undiscovered growth companies across the world.

Manager James Thomson says that against a backdrop of many countries growing at little more than stall speed, portfolios need to be balanced between areas that have reliable, defensive qualities and more economically sensitive investments.

“We like businesses that are easy to understand, demonstrate scalable and sustainable growth, have barriers to entry and are able to control their own destiny, with management teams that are entrepreneurial, prudent and flexible,” he adds.

“On the other hand, we avoid companies that are traumatised, turnaround or restructuring stories, vulnerable leaders and those that use a disruptive or unconventional technology.”

Niche offerings

Meanwhile, Neptune’s Global Equity Fund is another solid long-term performer, although more recent numbers have taken a hit from manager Robin Geffen’s preference for emerging markets.

This offering is broadly driven by Neptune’s global sector and macro research, which have encouraged Geffen to focus on areas such as China, Russia and – increasingly in recent months – the US. With sentiment improving early in 2012 on the back of various global measures to improve liquidity, the fund enjoyed a strong start to the year, driven by overweights in areas such as IT.

“The increase in risk appetite saw our emerging market holdings, particularly in the energy sector, perform strongly and our long-held overweights in China and Russia were once again well rewarded,” says Geffen.

“The second quarter saw a reversal of this optimism and emerging markets suffered somewhat unfairly as risk aversion increased.”
Looking forward, Geffen believes growth in the US is likely to accelerate again in the second half on account of a rise in real household income due to the recent fall in energy prices, a rebound in inventories from the current low level and a moderate pick-up in residential investment.

“We took advantage of price weakness in the second quarter to increase exposure to the US consumer via quality operators, such as Starbucks, which also offer good exposure to emerging market consumption,” he adds.

“Equities are undervalued, markets are lacking conviction and we therefore believe the potential for upside is significant. We remain focused on sector-leading growth stocks, with a continued bias towards China and Russia as well as the US.”

Another theme within global equities is the growing trend towards income, with funds focusing on this area now in their own peer group.
James Harries, who runs Newton’s Global High Income vehicle, says the growing global focus comes out of the fact the UK – where most have sought yield in the past – forces concentration in a small pool of companies.

Just as importantly for stock-pickers, more than 90% of the world’s highest-yielding stocks are now located outside the UK.

“In the ’90s, equity markets across the world were on a strong upward trajectory and this dividend culture was lost in many countries,” says Harries. “More recently, the culture of regular distributions has begun to reassert itself across the world, due – in no small part – to the well-trailed desire for income from retiring baby boomers.”

For global managers such as Harries, this means a broadly diversified pool of potential yield-producing names, from traditional markets such as the UK to wider Europe, the US and increasingly Asia, emerging markets and Latin America.

Steve Thornber, who runs the Threadneedle Global Equity Income portfolio, says these mandates give access to a much wider universe than UK peers, opening up sectors such as technology and materials.

Instead, his portfolio has a strong Asian skew, with 22% of total assets allocated to the East and a further 4.5% to Latin America.
“If you look at UK equities, there are no technology companies yielding over 4%, so managers only investing in our home market simply cannot access this sector,” he adds.

Proceed with caution

Linda-Jane Coffin, director of S&P Capital IQ, has just completed a review of more than 100 global equity funds and says the overriding feeling among managers is one of caution, with few making predictions in today’s directionless markets.

“Many are running high cash positions and balancing out any cyclical exposure with defensives, with the majority looking to play emerging markets through large-cap international names rather than direct investment,” she says.

At sector level, Coffin says IT and consumer stocks remain broad overweights across the sector, while financials is a common underweight, with little in banks and exposure skewed towards asset management businesses.



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