Global equity as the choice for the future

The global equity sector is host to a very wide range and number of funds – it is the chocolate box of the fund world. With such a large choice (I have counted over 3,500 funds) you could if you had the time find the perfect fit with your investment requirements, assuming you want a global fund. 

 

Funds can be thematic, specialist, multi-manager, concentrated, diversified, country-biased, quant-driven, tracking, large cap, multi cap, small cap, quality-biased, recovery, special situations, growth oriented, value-oriented, brand-focused, franchise-focused and, no doubt, there are more I have missed – and this excludes the emerging market global funds, global equity income and dedicated small-cap funds. Having such a large choice is not always a good thing in my view, so I have to ask: why invest in a global fund? 

 

 

Many investors, both professional and private, build their portfolios from regional funds based on those they think are best – the old adage ‘jack of all trades, master of none’ comes to mind with global funds. How can a manager of a global fund know the Japanese market as well as a specialist Japanese manager? Yet the sheer number of global funds tells a different story, and perhaps one which is very well suited to the future. 

Originally global funds were very much a one-stop shop for investors. In other words, investors needed to select just one fund to invest in and needed not worry about regional funds or having to do any homework about where the best opportunities lay – let the manager do that; after all, that is what the management fee is for. 

 

Today’s world is one in which globalisation dominates and the rapid and continuing growth of the internet will ensure this process happens ever more quickly. 

Mobile communications are a far quicker and cheaper way to build a telecoms infrastructure than with fixed lines. Remote and less-developed countries within Africa and Asia are increasingly able to access the internet and with this, the opening up of the world continues apace.

 

So in a globalised world global funds make a lot of sense. Most of the largest companies generate a significant part of their earnings from overseas, big stocks often have low exposure to their domestic economy. This is the case in Europe, the UK, the US, Asia and so on. 

 

The opportunities for companies to open up markets overseas is greater than ever as culture becomes more homogenised; products that sell well in the US or Europe are likely to sell well in Asia and vice versa. This is not new, of course – after all Japanese goods, for instance, have been availble internationally for decades, however ever more goods and services are now available globally. 

 

In past decades, the goods available have typically been large items, cars, televisions and computers, for example; but increasingly small, low-value products are available. I recently bought two batteries (€6 each) from a company in the US (free postage and packing), something inconceivable just a few years back. And as more and more of the world’s population increase their earnings and become ‘connected’ globalisation of both large and small businesses will happen. 

Another logical reason for investing in a global equity fund is the sheer scale of the options this provides a fund manager. By going global you give yourself the largest universe of stocks possible. This can cause problems, as well as, of course, managers will need to be able to filter huge quantities of data. 

Not surprisingly, many use quant screens to hone down their potential buy list. This approach also allows a manager to make stock comparisons across regional sectors – if the focus is banks, then a global fund is not restricted by borders and can seek out the best banks wherever they are. 

Many investors and managers follow global themes, climate change, health, population growth, China, energy and state intervention, to name some, and investing globally enables thematic investors to operate at their fullest extent – while playing themes regionally can work, investing globally in themes will provide the best opportunity set to exploit them. 

 

Most investors have a strong home bias in portfolios – perhaps familiarity and removal of the currency risk are good reasons for this but, from a stock market capitalisation point of view, it makes no sense. The US represents 54% of the MSCI World Index, while Germany and France are 4%, The Netherlands 2%, so logically portfolios in those countries should have substantial amounts in the US, especially as there are more companies, more global companies, a larger population, it is a more dynamic economy and so on, but this is often not the case. 

 

However, many global funds break this home-bias habit – a quick flick through geographical allocations shows the US weighting from 27% to 61% – all of which shows the differences that exist in global funds. Another interesting fact is that stock concentration varies hugely too, from 20 to well over 200. A large universe of stocks does not have to mean a very diversified portfolio, but it can if the manager chooses. 

With such a diversified sector and so many choices, the outlook for the sector is hard to pin down. Some global funds will be ideally positioned for economic conditions in 2014 but others will flounder. In theory, because global fund managers have the largest universe, they should be best placed of all managers to generate returns. In fact, their flexibility should provide both protection and opportunities that other funds do not have – if the outlook for Europe is poor, they can then switch to a region with better prospects. 

 This argument can always be made but it looks like global funds do not seem to be able to capitalise on this apparent potential all the time. While over the past three years the best global funds have been strong performers, a lot of the top regional funds have outperformed them. 

The most likely reason for this is currency movement. The best currency proxy for global funds is the dollar and when compared against the majority of funds in other sectors, top global funds have had the edge. 

This assessment is approximate but builds the case for global funds, accepting that they cannot compete against a regional sector which is in a strong bull phase and that currency is the major risk they face. Aside from currency risk, global funds do not face any greater threats than any other fund sector in 2014. 

By default global fund managers have the biggest pool of opportunities to fish in. The best have been delivering good results and I can see no reason why this cannot continue. 

For investors, there is the risk of currency movements going against them but it can also work for them. The daunting thing is the choice and working through this will take time. However, the reward could be a quality long-term holding or two. And for some investors, the original concept of a one-stop shop can still apply.