BLOG: Global funds offer valuable diversification in an uncertain world
The number one rule of investing is diversification. Don’t put all your eggs in one basket or put all your cash on a single company stock. The theory is, spread your precious savings so that you minimise the risk.
As the theory goes, it’s fairly reliable. When some of your investments fall (it will happen) others will rise (or fall by a lesser extent). One quick and easy way to split your risk is to invest in a global fund. This will scatter your cash to the four corners of the earth, but in a good way!
Ian Mortimer and Matthew Page, managers of the Guinness Global Innovators fund, point out that as well as greater diversification benefits given that all the holdings are not exposed to the same economic and market forces, global funds “have a larger investment pool versus a regional fund, and so have an opportunity to select the best stocks, within the investment remit, regardless of where a company is based”.
Having all your eggs in one basket
Investing in just a country’s main index, for example, can over concentrate your portfolio, not just by country but by sector. Taking the UK as an example, while investors in the FTSE 100 get access to a very globally-focussed index as many of the companies do business abroad, around 21% of exposure is currently in energy and resources firms, 17% in financials, but just 0.7% in IT (source: FTSE Russell, 28 April 2023).
The same can be said of the S&P 500, which has even been nicknamed the ‘S&P 5’ in past by Janus Henderson European Selected Opportunities manager, John Bennett, due to five very large companies dominating the index.
While their dominance has fallen over the past year or so, technology companies still make up more than 26% of the index, with Apple and Microsoft representing almost 14% of the index between them (source: Yahoo finance, 10 May 2023). That’s a lot of your eggs in very few baskets.
Diversification doesn’t necessarily mean quantity over quality
Diversification doesn’t necessarily mean investing in hundreds of global stocks. Mortimer and Page, for example, do limit themselves, but to 30 “best ideas”, where they invest in “high quality innovative companies found in all corners of the world”.
Guinness Global Innovators invests 81% in the US, 11% in Europe, and 6% in Asia Pacific (source: fund factsheet, 31 March 2023).
But looking globally gives a fund manager a lot of freedom. It enables the same two fund managers to invest in ABB and Schneider Electric, two European names that provide exposure to robotics and automation, while also backing US-based investments in advanced healthcare (Bristol Myers Squibb, Danaher, Thermo Fisher) and software and services, for example.
Having a global mindset
John Delano, manager of the Invesco Global Focus (UK) fund, makes the case that a valuation reset across much of the market last year, combined with a historically strong US dollar beginning to weaken, may make the current environment a particularly good time to invest globally rather than regionally.
The sands have been shifting for a while, and as investors run to catch up, global funds, given their wide remit, can be nimble to opportunities.
In 2022, markets began transitioning from a period of ultra-low interest rates and exceptionally high liquidity to a more historically normal world.
Delano expects that “as we move back into a more typical environment, fundamental investing rules will once again be relevant”, and investors will be increasingly sensitive to measures of pricing power, balance sheet stability, and quality indicators in general.
As he rightly points out: “Most large companies today have a global business model, and we believe that having this same global mindset when it comes to investing is critical to our clients’ long-term success”.
Dividing the investment universe into regions can allow an investor to get a good grasp of the opportunities in that area. But Andrew Harvie, client portfolio manager of the CT Global Extended Alpha fund, believes regional investing “can create artificial boundaries”.
“Why constrain yourself? A global approach can give you the broadest opportunity set from which to choose and, hopefully, the best chance to deliver an attractive return,” he points out.
There are, he adds, many structural themes that support the global return opportunity right now, from the world becoming more digital, to demographics (deteriorating in many regions, but also attractive in others), or tackling sustainability issues such as decarbonisation or biodiversity loss.
His view is these themes “suggests perhaps the most diversified opportunity set that we have seen for some time, and different companies across different regions will be well positioned to benefit”.
The withdrawal of ultra-cheap debt which has benefited governments, companies and investors is currently creating corporate casualties investors will want to avoid. Globally-focused funds can’t guarantee anything, but they do at least offer multiple routes out of choppy waters and into more successful investment territory.
Funds to consider
As well as the aforementioned funds, investors looking to invest globally could consider a fund like Capital Group New Perspective. It has a track record of 50 years, investing in some of the world’s largest multinational firms that are able to benefit from transformational changes in the global economy. The fund has a unique multiple manager structure, with each of the nine named managers running their ‘sleeve’ in their own way. Their best ideas are blended together for a diversified portfolio.
Another option is Rathbone Global Opportunities which is run with a flexible approach around company size, sector, and geography, although the sweet spot is mid-sized growth companies in developed markets, which is where the manager believes his core investment strengths lie.
Alternatively, Morgan Stanley Global Brands has a mantra: ‘don’t lose money’, which will possibly be as comforting to investors as the familiar names that can be found in the portfolio. The management team looks for high quality companies with defendable and visible future earnings, allowing them to give attractive returns to shareholders and reinvest in their business to stay ahead.
Darius McDermott is managing director of Chelsea Financial Services & FundCalibre