The Best Global Trusts And Funds

The easiest way to diversify your portfolio is to add overseas exposure using a global fund. A well-managed mandate has the scope to add value via both the asset allocation and stock selection decisions, but there is a lot to consider when choosing which ones to go for out of all the hundreds on offer.

It has been a volatile period for the international markets with the MSCI World index up 15% in the six months to the end of June, after an 18% decline last year. This popular benchmark measures the large and mid-cap performance of 23 developed markets and has achieved a five year annualised return of almost 10%.

The positive backdrop has enabled the global investment trust sector to make an average cumulative return of 38% over the last five years, yet the 14 trusts are available at an average discount to NAV of 13%.

There are lots more − almost 500 − open ended funds operating in the IA Global sector and over the same period they have generated returns of between 157% and -17%! The average is an impressive 43%, although the dispersion is enormous.

What To Look For In A Global Fund

After such strong performance the valuation metrics are starting to look a bit expensive with the MSCI World index trading on a forward PE multiple of 17 times earnings and a price to book value of three. A lot of this is because of the high weighting of the US, so you need to bear this in mind when considering the asset allocation of the various funds.

Another key point is to understand the investment process that a manager is following. Any actively managed mandate that hugs the benchmark probably isn’t worth bothering with given that the index is hard to beat over long periods of time and can be bought cheaply via a passive investment.

Juliet Schooling Latter, research director at FundCalibre, says that investors should look for consistent alpha generation over the long-term.

“This effectively refers to the fund’s ability to generate excess returns from its portfolio of investments over benchmark returns. Funds that have displayed the ability to beat the market over many different time periods should be looked at favourably.”

When doing this it is important to check that the fund’s management team hasn’t changed during the period of performance that is being assessed, otherwise it could invalidate the comparison and affect the returns going forwards.

All In The Detail

Ryan Hughes, head of active portfolios at AJ Bell, says that there are lots of different types of global funds, but a key characteristic is the investment style, with some focused on growth companies, some on value and others with specific tilts to themes or sectors.

“Growth investing was very much in favour and therefore funds following this style looked good and then it fell out of favour so performance started to look poor. This kind of market rotation highlights the dangers of solely judging funds based on their past performance as without context it’s of little value.”

Another point to take into account is a fund’s geographical spread, as this will give an indication of how much risk they are taking relative to the benchmark. The choice of index is also important as some just focus on the developed markets, whereas others include the emerging markets alongside them.

Rob Morgan, spokesperson and chief analyst at Charles Stanley, says that there can be more variety amongst global funds.

“There are some specialist options, especially within the investment trust universe where there can be a narrower focus on a theme or type of company. Performance here can be expected to differ from a global benchmark or more mainstream investments quite markedly, especially in the shorter term.”

Checking the benchmark and objectives of the fund, as well as looking under the bonnet to assess the strategy and the sorts of stocks owned, can help build a picture around why a fund has performed the way it has and whether the manager has done a good job or not.

How Many Global Funds Do You Need?

It is generally best to blend several different global funds together, although it depends on the size of your portfolio and whether you have lots of other funds with a specific geographic focus. The problem is that it is easy to end up with large areas of overlap.

“Duplication is a big issue, especially if you’re investing in sector funds alongside mainstream ones,” warns Ben Yearsley, a director at Shore Financial Planning. “Big tech is often found in many global growth funds, therefore if you have a tech fund alongside it’s quite likely you’ll be double counting.”

The best way to avoid this is by doing your due diligence on the various global options by using one of the fund platforms. This will provide the necessary information on investment styles and geographic exposure that will help you to identify complimentary holdings.

An easier strategy is to combine a growth fund with a value fund. Alternatively, you could invest in a global large cap alongside a global small cap.

For some investors, gaining simple market exposure will be sufficient. This can be achieved via a low cost global tracker, which would provide an instantly diversified portfolio that includes the largest companies in the world.

“For those wanting to take a more active approach, operating a core/satellite strategy may be appropriate, as it allows investors to tilt the portfolio towards areas of interest. This would see a large percentage of assets placed in a low cost tracker (the core) and then selected satellite funds added at the periphery,” explains Hughes.

A passive fund that tracks MSCI World would be an option and many active funds also use the same benchmark. The one thing to bear in mind is that the US makes up around 70% of the index so you need to be careful not to be over exposed to this one market.

The Best Global Funds

When it comes to the different funds, Schooling Latter recommends BlackRock Global Unconstrained, which has a solid philosophy and strategy. It benefits from access to the firm’s extensive resources and is led by two exceptional managers, Alistair Hibbert and Michael Constantis.

“The fund has provided investors with excellent returns since its January 2020 launch, even amid the challenging conditions faced by other quality growth strategies and I would expect this to continue,” she says.

Morgan is also a fan and says that it is a pure stock picking fund in the hands of an accomplished manager.

“Hibbert searches for the growth compounders of the coming decade and beyond with no regard for any benchmark. It is likely to be more volatile than some of its peers given the very high conviction approach.”

Alternatively Schooling Latter suggests Brown Advisory Global Leaders, which has a clear philosophy and process with a strong emphasis on businesses that have ‘superior customer outcomes.’

“I like their dedication to thorough fundamental stock research as well as the manager’s willingness to scrutinise their own performance. With excellent performance to date, I have confidence that the fund has the potential to deliver strong results in the future.”

More Recommendations

Another option suggested by Morgan is Stewart Investors Worldwide Sustainability, which he describes as a differentiated fund with a long-term perspective that seeks to identify sustainable business models and predictable growth.

“All stocks must meet the managers’ strict criteria, with particular emphasis on sustainability of earnings and quality of management. The approach also focuses on companies whose operations reduce negative environmental and social impacts and steers away from companies facing sustainability headwinds, so it could be of particular interest to investors looking to take a responsible approach.”

Schooling Latter likes TB Evenlode Global Equity that has been a resounding success since its launch.

“With two impressive fund managers, a proven investment process and a geographically diverse but concentrated portfolio, it has consistently outperformed by targeting high-quality cash-generative companies. This strategy is in very good hands and it wouldn’t be a surprise to see its excellent performance continue.”

Alternatively there is Schroder Global Recovery that focuses on out of favour companies that have the potential to recover, which should do well when value is in the ascendancy.

“The experienced team at Schroders follow a deep value approach, scouring the worst performing companies on the market to try and identify those that have the ability to turn it around. As a result, the fund looks very different to the global benchmark, currently running a significant underweight to the US and not owning the popular technology stocks that have performed so well,” explains Hughes.

Investment Trusts And Passives

There are fewer investment trusts to choose from, but of the available options Morgan likes the AVI Global Trust (LON: AGT), which aims to unlock value in a portfolio of global companies, often through engagement and activism.

“The portfolio is broadly split between three types of opportunity: holding companies, closed-end funds and Japanese special situations. It is a good example of how an active investment can provide genuine diversification and different drivers of return in a portfolio.”

At the other end of the style spectrum there is the Monks Investment Trust (LON: MNKS) recommended by Hughes. It is managed by Baillie Gifford and has a clear tilt towards growth investing, which is why the recent performance has struggled.

“For long-term investors, a focus on growing companies should have some appeal and this trust gives exposure to over 120 stocks. It is not as well known or as volatile as its cousin, Sottish Mortgage (LON: SMT), but it’s a well-managed trust that has potential to recover after a very challenging couple of years.”

If you would prefer a passive alternative he suggests the HSBC FTSE All World Index Tracker. The index replicates the broader market and includes exposure to Asia, as well as the familiar larger companies in the US such as Apple, Amazon and Microsoft. It has a low ongoing charges figure of just 0.13%, making it a cheap method of gaining wide international exposure.

Specialist Options

Those who already have a mainstream global equity fund might want to compliment it with a more specialist international mandate. A good example is Polar Global Insurance that is recommended by Yearsley.

“Many people deride this fund as a bit dull, yet it’s consistently delivered eight to ten percent per annum over almost two decades. It doesn’t invest in general insurance companies that you might know such as Aviva or L&G, but more specialist ones that often operate in re-insurance and are listed in the US,” he says.

A higher risk option that he likes is Montanaro Global Select, a global small and mid-cap fund from a manager who only invests in this end of the spectrum. It is a best ideas mandate from a specialist boutique that follows the house style of quality growth.

Alternatively there is First Sentier Responsible Listed Infrastructure, which Yearsley describes as a core, defensive holding with a responsible overlay. The fund invests in key infrastructure assets that are typically in everyday use and often benefit from revenues with inflation linkage.