RSMR: Taking a core and satellite approach to global funds

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Global funds allow an investor to gain worldwide equity exposure, managed at both a strategic and tactical level. They provide this exposure without requiring the levels of capital needed for a sector specific portfolio. Funds in the IA Global sector must invest at least 80 per cent of their assets globally in equities and have the prime objective of achieving growth of capital.

The events surrounding Brexit are now fading slightly in terms of the effect on global markets as the US election result has taken centre stage. The reaction to Brexit was in the end somewhat surprising with markets recovering more strongly than expected. There will however be further uncertainty created by the UK decision to leave the EU which may well manifest itself in 2017 as more is understood about the path that will be taken.

For the investor who was overweight in global equities the result of the vote to leave the EU acted as a boost to their returns as sterling devalued considerably against all core global currencies. The Bank of England’s strong policy response of cutting rates and boosting quantitative easing also had a short term positive effect by backing UK plc and along with currency weakness strengthening export competitiveness.

Historically many stock markets perform well in local currency terms after a devaluation and the UK has been no exception to this. Recent economic data has seen a shift in forecasts from many investment banks and now a slowdown in growth rather than outright recession is predicted. Part of the market optimism may be based on a belief that a soft rather than a hard exit from the EU will occur but if negotiations are lengthy, uncertainty will be a drag on corporate capex in the UK and at the moment there is no clarity on the process, timetable or likely outcome of the exit.

In the US the decision around interest rates is still having a strong bearing on world markets, as a rise in December is looking more likely, subject to global conditions remaining favourable. Clearly a strengthening dollar may well have repercussions in emerging markets which have performed very strongly over the last quarter. There is some belief that the emerging markets have become more independent of this factor but sentiment may well dictate the path of markets ahead of fundamentals.

The most recent election result has clearly thrown some new policies into the mix as far as the US is concerned. It will be interesting to see how the initial rhetoric will be translated into actual policy. The first soundings have been pro-business with lower corporate taxes and fiscal expansion being expressed as key elements of the presidency. Overall this can be seen as positive but other elements also suggest higher trading tariffs and more US isolationism which would be negative for the global economy.

The pre US election performance of Asian and emerging markets has been a reflection of stabilised commodity prices and a stable US dollar, and also a realisation that a number of economies such as Brazil have been oversold in recent months. Whilst the region has been in the global spotlight due to the Olympic Games in Rio, Brazil and the rest of South America has been a point of focus for investors all year as there have been flows to emerging market debt. Although the Brazilian economy is in recession, political change and a belief that the worst has now passed means this has been one of the world’s best performing markets year to date.

Investors in both debt and equities in the region were attracted by record low valuations and a hunt for yield. Like many parts of the emerging world today, these markets are no longer a homogenous group. The challenge for investors and fund managers is to work out which are the most attractive ones. Factors influencing performance in this market include how investors perceive it has learned from past crisis or mistakes, the current quality of its policy mix and whether structural reforms are being undertaken to boost productivity. The recovery in Brazil has been dramatic and in other economies the resetting of markets has been positive across a wide range of economies.

In Africa hopes have faded from the optimism prevalent at the start of the decade, when there was talk of ‘Africa Rising’. The two largest sub-Saharan markets, which dominate African equity benchmarks, both have serious problems and are close to recession. South Africa has suffered from the end of the mining boom and the corruption which has hindered development in the post-apartheid world. Nigeria has suffered from a serious decline in oil revenues and a reluctance to devalue the currency which resulted in a shortage of US$ in the country. Whilst many smaller African countries continue to grow, including Kenya, Rwanda, Ethiopia and the Ivory Coast, these are too small and illiquid for investors to access easily.

Globally there are, as usual, a number of issues both political and economic that are hindering growth and which look like keeping economic growth on a ‘lower for longer’ path before we reach healthy growth rates once again. At the same time it is not expected that another recession will ensue as the US continues to return strong data and other parts of the world, especially in emerging markets, continue to grow positively. A global fund can be well placed to negotiate these issues and take advantage of the opportunities that exist.

Our approach to fund selection would be to use one or more core funds supplemented by satellite funds for larger or more specialist investments. Our core fund selections would include:

  • Artemis Global Growth – this fund is able to move flexibly and increase or decrease holdings to take advantage of market conditions. The SmartGARP process is likely to result in a portfolio that is quite different to the index and this can sometimes lead to higher levels of volatility.
  • JOHCM Global Opportunities – this fund has an unconstrained approach looking to pick up on cross border valuation anomalies. The focus is on the cheaper bits of high quality within the market. Value is assessed on an absolute rather than relative basis managers prepared to hold up to 20 per cent cash.
  • Stewart Worldwide Sustainability – this fund invests in quality companies with strong valuation disciplines, adopting an absolute return mind set. Stewardship Companies are analysed over a longer term basis to understand how they perform over a whole economic cycle favouring long term business franchises.

Whilst our satellite choices would include:

  • Invesco Perpetual Global Smaller Companies – this fund has a based regional approach, it is non benchmark valuation led, with themes leading regional stock selections.
  • Rathbone Global Opportunities – this is a bottom up portfolio influenced by global themes and is likely to be more conviction based and therefore have a more volatile investment profile.
  • Standard Life Global Smaller Companies – this fund uses a Stock Matrix to buy stocks they feel will grow to be tomorrow’s global leaders –focus on companies showing positive change.

Ken Rayner is founding director at RSMR.