The events in 2008 acted as a reset button for many asset classes including bonds, equities and property. Following the extraordinary intervention by central banks around the world in the form of Quantitative Easing (QE), there has been a virtually unbroken bull market for equities and bonds. Notably, growth has not been at the same rate across all regions due to specific issues such as persistent Japanese deflation, the European sovereign debt crisis and the economic uncertainty surrounding BREXIT. The result has been considerable variations in equity returns. In the US for example, investors have seen significant levels of growth whereas Europe and Japan have struggled to keep pace.
More recently, sentiment has shifted with Europe and Japan providing attractive opportunities for many fund managers. However, the protectionist stance of President Trump has changed sentiment resulting in the rotation away from the US/UK to Europe and Japan being stopped in its tracks.
Markets are fickle and will react positively or negatively to events around the world - having all of your 'investment eggs' in one basket by focusing on one region or sector can affect returns considerably. Every region, advanced or emerging will go through periods of positive and negative economic activity. Having a diversified portfolio that invests globally could help mitigate the volatility investors experience when focusing on one region - investing in a global fund could be the answer.
Getting the timing right to make adjustments is not an easy feat as things change very quickly and for a retail investor it is almost an impossible task. Take for example the immediate effect of the tax changes introduced in January 2018 by Donald Trump which have given further reason to hold onto US assets. Although it was common knowledge that the administration was working on this, the speed at which the legislation passed through Congress caught many by surprise - investing in a fund with a global remit will have provided exposure to the US at that time ensuring investors participated in the market rally.
Key benefits of investing globally:
- performance should be less dependent on one region or sector
- can be ideal for those looking for indirect exposure to emerging economies
- in uncertain times the strategy provides a level of diversification
- improvement in the breadth of investment opportunities
- can be expensive due to higher fees
- currency exchange rate risk
- change in business environment due to political risk
There are many global funds - what should I look for?
It would be natural to assume that if a fund classes itself as 'global' that is exactly what it should be - investing in companies around the world. Surprisingly though, many have a bias to a particular region such as the United States. A true global fund is one with exposure to many regions - particularly important are the emerging markets. Fund managers can accomplish this directly by investing in local companies or indirectly by investing in companies that are based in the UK for example but have emerging market operations. The importance of Emerging markets is highlighted in teh table below.
Total market capitalisation of the various regions of the world in trillion US Dollars
Note that the United States represents 36.2% of the world's market capitalisation and the Emerging Markets accounted for 24.6%. If an investor wished to hold a global portfolio weighted by market capitalisation, almost one quarter of that portfolio would have consisted of Emerging Market equities.
Whilst the US is still the largest economy in the world today, its lead continues to shrink as emerging market regions expand their economic output more rapidly. These emerging regions are being assisted by a number of factors but none more so than the powerful structural trend of a growing middle class.
The spending power of the expanding middle-class population is leading to greater consumption related expenditure which in turn is benefiting those companies that invest in the sector.
Globalisation and an increase in cross border trade have had a significant impact on emerging countries and have helped them grow economically and socially. The promise of cheap labour and the availability of abundant resources are attractive for many companies. Today, a large number of companies headquartered in the UK, Europe, Japan and the United States generate an increasing proportion of their revenue overseas. Globalisation has required many companies to change their focus from inward looking to an outward looking one to remain competitive.
Are all global funds the same?
The simple answer is No!
Globalisation has led to a closer correlation between different sectors with many companies generating revenues from multiple regions. There is a growing opinion that if a fund manager simply selects the top performing companies in a sector index, for example the FTSE 100, that the portfolio could become too index focused. The fund manager may also have restrictions imposed by the fund investment mandate and could miss out on investment opportunities.
Having a flexible investment mandate is important so that opportunities are not missed. A good example of one such opportunity can be see with the development of Fever-Tree, the drinks manufacturer founded in 2004. Its success story is well-documented and there seems to be almost daily commentary on their latest innovations and expansion plans. Today many global funds have a holding in the company following its meteoric rise but only those funds that have flexible investment mandate would have invested earlier in their development cycle.
If you want further information on howto invest in global funds, please contact us for more details.
The information in this article was accurate as at the date of publication in September 2018.