Global growth funds offer lower risk and more stability because so many prominent companies straddle international borders and are less exposed to the health of individual countries.
In a world where markets and even economies seem to be increasingly intertwined, is there no longer a case for investing on an individual country basis? After all, most prominent industries are truly global. Want to invest in the pharmaceutical sector? There are global giants in Britain, America and in several European countries. Telecommunications equipment? Finland, America and Japan all feature strongly.
While there is little doubt that many investors will trawl the globe to find the company they seek, there are reasons to pursue a defined country route.
Smaller companies, for example, tend to be much more dependent on the health of the economy in which they are based. Asset and liability matching can demand a more specific geographic remit. But global investing is an increasingly popular means of gaining exposure to the equity market.
Increasingly research houses use their analysts to make comparisons between companies across borders. Given the globalisation of business, this makes sound sense. GlaxoSmithKline, for example, may be a UK-listed company, but it conducts a minority of its business in this country. Diageo, the drinks giant, has less than 10% of its sales arising in this country.
At present there are just short of 200 funds classified under the “Global Growth” Investment Management Association (IMA) sector. This grouping covers a range of investment styles and approaches.
There are those funds that do pursue smaller company opportunities, perhaps because they can build in greater diversification in this often volatile sector. And with a few notable exceptions, there is less consistency among the fund managers.
Neptune is one example of a manager that has stayed at the top of the tree. Featuring in the top five over one year and three years, and ranked sixth in the six-month table, its Global Opportunities fund demonstrates that this group can perform in more broadly drawn mandates, as well as in such specialist areas as Russia and China.
The CF JM Finn Global Opportunities fund similarly keeps in the top 10, despite an indifferent January, but apart from these two funds, there is a tendency for performance to swing around a little.
The Artemis Global Growth fund, for example, has slipped to third quartile for the shorter time-frame, while Rathbone slipped to fourth quartile over the same period. And there are a wider range of funds in these tables than in many other sectors.
The other message that emerges from the tables is that performance is rarely excessive – in either direction.
True, over six months an investor could have lost as much as 18% if he had invested in New Star’s Global Equity fund (in contrast to the Tactical Portfolio fund, which ranks in the first quartile over all three time-frames reviewed), but a spread of plus 3% to minus 18% is towards the low end of the variation you are likely to find in individual sectors.
This is somewhat surprising. After all, if the world is your oyster as a fund manager, then you might expect a wide variation in the make-up of the various funds.
But a glance at the tables will show that performance tends not to vary that greatly, despite different approaches and constituents. And in this, arguably, lies the strength of these funds.
Just as the large international generalist investment trusts are often touted as the one-stop shopping choice for investors, so a global growth fund can deliver diversified equity exposure, which will avoid the necessity of having to engage in geographic asset allocation decisions. Such funds appear ideal for the long-term investor, unlikely to wish being bothered with having to make interim changes to the portfolio.
The most obvious among these will be establishing a fund for a child. Investing at an early age in a global growth fund should ensure a build-up of capital without, hopefully, the wild fluctuations that can assail individual markets.
And such an approach should also take care of the shift in economic strength and investment trends that take place, such as the drift to the East as Asian emerging economies acquire more power.
The popularity of this approach is clear from the choice available to investors. As well as satisfying the needs of long-term, passive investors, these funds can also be used to effect for the international part of smaller investors portfolios or as a core holding for those who adopt a “core/satellite” approach. In other words they are as versatile a tool as any in the investment planner’s armoury.
But selecting the right fund is as difficult in this sector as in any. Nor do the performance statistics suggest these will appeal to those who crave a little excitement in their investment portfolios.
Still, the lower likely volatility and the greater spread of risk will make them suitable for a variety of situations. Researching the underlying fund and understanding how the manager operates will be crucial if the right match is to be made.
Brian Tora is a consulant to JM Finn.