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Global sector

Global sector

Funds in this sector tend to focus on capital growth and can differ markedly from each other in terms of exposure to sectors, countries or regions.

Heather Ferguson - Investment Analyst
27 February 2017

A fund investing in the UK is often the first port of call for many UK investors. Yet the number of funds investing overseas has increased over the years and could provide important diversification as part of a wider portfolio

Funds in this sector can differ markedly from each other. Some managers have more flexibility than others in terms of how many stocks they can hold or how much exposure they have to different sectors, countries, or regions. For example, some could have more exposure to higher-risk emerging markets or smaller companies. Funds should therefore be judged on their individual merits to ensure they are right for an investor’s circumstances.

Until recently, most UK investors were largely confined to the UK for exposure to smaller companies or income-paying companies. However, over recent years the number of companies outside the UK offering attractive yields has increased rapidly. Equally, technological advancements, such as the internet and more efficient global distribution networks, have enabled many smaller firms to level the playing field with established rivals.

Investing overseas also expands the opportunity set in sectors such as pharmaceuticals and tobacco, where UK dividend-paying companies have a strong presence and provides access to sectors not as well represented in the UK, such as technology.

Global investments also offer exposure to other currencies. The pound’s recent weakness has made dividends from foreign companies more valuable to UK-based investors, although if sterling were to strengthen the value of overseas dividends would fall.

Our view

We have long held the view that a well-balanced portfolio will provide the most consistent returns over the long term. Working out which market or currency will perform best in any given year is no easy task. Keeping a foothold in most areas with a geographically-diverse fund eliminates the need to guess and reduces market-specific risk.

Within our Wealth 150 we have included a mix of global funds with different investment strategies and areas of focus, which we believe will deliver good returns for investors over the long term. Different investment styles will come in and out of favour in the shorter term and we would therefore suggest investing in a selection of funds using different approaches. A number of funds in this sector are covered in more detail within the ‘fund reviews’ tab of this sector report.

Alternatively, investors seeking a geographically diverse and well-balanced portfolio could consider the HL Multi-Manager Special Situations Fund. Roger Clark and David Smith blend regional funds, investing in areas such as Japan, the UK or Europe, to create a core global growth fund. It also has exposure to a number of unconstrained funds investing worldwide. The fund benefits from our in-house research and we feel the additional costs associated with running a multi-manager fund are justified by the benefits of this approach.

The HL Multi-Manager Special Situations Fund has exposure to higher-risk smaller companies and emerging markets.

The HL Multi-Manager funds are managed by our sister company HL Fund Managers.

HL Multi-Manager Special Situations Key Investor Information Document

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

FTSE World Index five year performance:

The past year has been a turbulent time for stock markets worldwide. Global economic and political events altered the investment landscape. The early months of the year were dominated by concern over global economic growth, a slowdown in China, and Brexit speculation, while the US Presidential election sent stock markets into a spin in the second half of the year.

Despite wider economic concerns all major global stock markets posted a positive return in sterling terms. The UK and Europe lagged other global stock markets, although the UK’s decision to leave the EU did not have as big an impact as many feared - the FTSE All Share Index grew 20.4% in 2016. Emerging markets were one of the strongest performing areas of the stock market in 2016. Many emerging market economies benefitted from a recovery in commodity prices in the early part of the year and weaker sterling boosted returns for UK based investors. Concern over potential protectionist policies in the US, alongside a stronger pound over the past three months has reversed some of this strong performance, although the region still returned almost 44% over the year. Please note past performance is not a guide to the future.

Source: Lipper IM to 31/01/17. Past performance is not a guide to future returns.

Annual Percentage Growth
Jan 12 -
Jan 13
Jan 13 -
Jan 14
Jan 14 -
Jan 15
Jan 15 -
Jan 16
Jan 16 -
Jan 17
FTSE All-Share 20.06 -4.63 7.11 10.1 16.3
FTSE AW Asia Pacific ex Japan 39.19 -12.38 21.35 -8.01 13.9
FTSE Emerging 43.31 -16.73 19.98 -15.03 7.52
FTSE World Europe ex UK 24.41 -2.05 7.52 11.08 23.59
S&P 500 35.34 5.18 24.99 17.23 16.23
Topix 31.7 5.98 12.37 14.25 6.03

Source: Lipper IM to 31/01/17. Past performance is not a guide to future returns.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Five year performance

  • IA Global sector


Source: Lipper IM to 31/01/17. Please remember past performance is not a guide to future returns.

Fund reviews

We undertake a comprehensive review of every sector. Here we provide comments on a selection of funds of interest following our most recent Global sector review. They are provided for your interest but are not a guide to how you should invest. If you are unsure of the suitability of an investment for your circumstances seek personal advice. Comments are correct as at end January 2017. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

There is a tiered charge to hold funds in the Vantage Service with a maximum of 0.45% p.a. - view our charges.

Wealth 150 Fund reviews

Other funds in this sector

Here we look at some other funds of interest following our most recent sector reviews. Please note the review period may be over a short time period and past performance is not a guide to future returns.

To view a full list of our favourite funds within the sector, visit the Wealth 150

Source for performance figures: Financial Express

Nick Train, Michael Lindsell and James Bullock focus on durable businesses they believe will stand the test of time, particularly those with strong brands and barriers against competition.

Innovative companies that drive changing trends will always be one step ahead of peers, in the managers’ view, while a strong brand also aids longevity. These traits are often found in technology companies, but are also prevalent among consumer goods businesses, where 53% of the fund is currently invested. Long term performance has been exceptional; however, it has been lacklustre over the past year as investors have shifted their focus from the durable businesses the managers favour to more undervalued and economically-sensitive areas of the market.

The managers are among the most talented stock-pickers investing in the global equity space, in our view. We have conviction in their ability to identify companies well placed to succeed over the long term.

The fund has exposure to higher-risk smaller companies and is a concentrated portfolio of around 30 companies which means each investment can have a significant impact on total returns.

Peter Meany and Andrew Greenup invest in a wide range of businesses, including those operating toll roads, airports, ports, railroads, utilities, pipelines, energy storage, mobile towers and satellites.

These sectors all benefit from high barriers to entry (it is not easy to build a new airport to rival Heathrow or an alternative to the Dartford Crossing). Although their prices are regulated, tariffs and charges often rise in line with inflation, providing a reliable income stream. The fund is concentrated and exposed to smaller companies and emerging markets which adds risk.

The fund has performed well over the past five years as investor demand for defensive, income-paying investments has boosted share prices in this sector. The ‘steady’ characteristics of investing in infrastructure (such as reliable cash flows, inflation protection and the necessity of their services) has also provided an element of shelter during times of falling prices. Please remember, past performance should not be taken as an indicator of future returns.

Peter Meany has over a decade's experience as an infrastructure and utilities analyst, and has managed the fund since launch in October 2007. He is supported by Andrew Greenup and a well-resourced and experienced team at First State and adopts a tried and tested investment approach.

James Thomson selects companies based on their individual merits although there are often several investment themes running though the portfolio.

As a stock-picking investor, James Thomson pays little attention to the constitution of the benchmark and the fund currently has very little exposure to banking and no exposure to oil & gas companies. This positioning hurt performance over the past year as these companies have generally performed well. The manager will continue to avoid these areas as he dislikes the unpredictable nature of their earnings streams and heavy reliance on wider economic strength.

The manager keeps the fund concentrated between 40 and 60 investments to ensure each can have a meaningful impact on performance, although this is higher-risk. The fund is currently at the top end of this range, so for a new investment to join the fund, one needs to be sold.

We rate James Thomson highly and believe he has the potential to deliver attractive long-term returns. The manager invests in smaller stocks than many of his peers as he tends to find the most exciting opportunities among medium-sized companies. Our analysis suggests he consistently adds value through his stock selection. The fund could offer diversification and balance to a portfolio, and as it tends to focus on developed markets could sit well alongside a global fund with a bias to emerging markets and Asia.

Please note, the manager has the ability to invest in smaller companies and emerging markets, both of which add risk. He currently has very little exposure to these areas.

Alan Rowsell seeks to identify quality companies capable of strong growth, which have been undervalued by other investors, but where a change in sentiment could be reflected in a rising share price.

The manager uses a unique stock-screening tool, the ‘Matrix’, which scores more than 6,000 smaller companies across the world on a number of factors such as dividend yield, earnings and the share price’s direction of travel. Alan Rowsell meets the management of companies that score highly to identify those he believes could become tomorrow’s larger businesses. Companies identified by the Matrix in the past have included Rightmove and Ted Baker, which have both proven hugely successful.

Alan Rowsell feels higher-quality, smaller companies capable of sustainable growth are currently undervalued by other investors who have recently favoured more economically-sensitive areas of the stock market. This trend accelerated following Donald Trump’s election as US President in the belief his policies will boost economic growth, in the manager’s view. However, Alan Rowsell is sceptical Donald Trump will succeed and maintains his focus on higher-quality businesses that he believes will prevail over the long term.

Alan Rowsell is a capable and experienced manager who benefits from the support of the wider Standard Life investment team. This fund remains one of our favoured ways to access the wealth of opportunity among global smaller companies.

Smaller companies tend to be higher-risk investments than their larger counterparts. The fund is concentrated at around 55 holdings which allows each position to have a greater impact on total returns but is a higher risk approach.

Newton employs a global thematic approach to help them uncover the key risks and opportunities present in the market. They then invest in companies they feel will benefit from these trends.

These themes evolve over time allowing them to benefit from changing market conditions. Newton's research team’s current view is that the world has become over-indebted, hence seeking to reduce debt is a natural consequence. Therefore, the current focus is on large, well-financed, defensive businesses, particularly in the healthcare and consumer goods sectors.

The fund underperformed its global benchmark in 2016, particularly over the second half of the year. Economically-sensitive companies, including those in the financial sector, performed well in response to the election of Donald Trump to the White House due to his pro-growth stance. The fund has less invested in these areas than the index as the team currently favours defensive, durable businesses, and so was left behind the strong performance of the index. Despite the fund’s underperformance, returns for UK investors were good as the fund benefitted from weaker sterling.

The fund is relatively concentrated at 50-70 stocks and has historically had a bias towards larger companies, though it can invest in higher-risk smaller companies. Currently the fund is biased towards developed markets, although it can invest in higher-risk emerging markets and the team has made full use of this ability in the past.

Terry Smith invests globally in high quality companies which are difficult to replicate and have low levels of debt.

The fund has generated very strong returns since its launch in 2011, although performance over the past year has been weaker. The fund has tended to be weighted towards the consumer goods sector, which has aided returns since launch as investors have favoured these companies for their dependable earnings. Investments in this area, which include companies such as Pepsi and Philip Morris, currently account for around 38% of the fund. However, over the past year, investors have preferred to invest in undervalued and economically-sensitive areas of the market, causing this fund to lag its peers.

This period of underperformance is to be expected based on the fund’s positioning and all managers undergo periods where their style is out of favour. However, Terry Smith's track record is relatively short and he is as yet untested in an environment of prolonged, falling share prices so the fund is not currently under consideration for the Wealth 150 list of our favoured funds across the major sectors.

The fund is concentrated at around 30 holdings which allows each position to have a greater impact on returns but is a higher-risk approach.

Jeremy Podger seeks to exploit share price weakness, often caused by other investors misunderstanding a company's valuation or underestimating its growth potential.

The manager seeks to buy a stock at a reduced price and benefit from a rise in the company's share price as other investors begin to realise its potential. The companies in which the manager invests typically fit within one of three categories:

  1. Exceptional value - companies the manager feels have the ability to generate earnings ahead of expectation. The fund’s investment in US Bank Citigroup currently fits in this category.
  2. Corporate change – businesses undergoing restructuring, mergers or acquisitions. Royal Dutch Shell is a current example of a company that meets this Critera.
  3. Unique businesses – those the manager feels have a dominant industry position, strong growth potential and the ability to increase prices. Walt Disney is a current example.

The fund’s performance has been good over Jeremy Podger’s tenure, who has been at the helm since March 2012, although it experienced some difficulties over the first half of 2016. Jeremy Podger previously managed a global fund at Threadneedle where he showed some ability to outperform, though this had not always been consistent. We are encouraged by the manager’s performance and our analysis suggests he adds value though good stock selection. However we would prefer to see a more prolonged period of good performance before considering the fund for the Wealth 150 list of our favoured funds across the major sectors.

The fund has exposure to higher-risk emerging markets and the manager has the flexibility to use derivatives which also adds risk.

Latest research updates

  • Fund manager Lauren Romeo has not changed her investment approach since Donald Trump’s election victory
  • The manager continues to seek good-quality companies trading below their true worth
  • She believes Trump will have some positive impact on the US economy as he is seen as pro-business

Our view

Lauren Romeo, manager of the Legg Mason IF Royce US Smaller Companies Fund, seeks good quality companies. They should be in a strong financial position, with little or no debt and a track record of making a good return on the capital invested in the business. She aims to invest when these qualities are not being appreciated by other investors and the company is valued below its true worth. It is an approach we favour and the fund retains its place on the Wealth 150 list of our favourite funds across the major sectors.

Lauren Romeo remains optimistic in her outlook and we feel the long-term prospects for this fund are positive. The manager is part of a well-resourced team with a long and impressive track record of generating strong returns for investors. We are also encouraged to see an improvement in the performance of the fund after a couple of tough years, though as always past performance is not a guide to future returns. In our view this fund provides investors with an excellent opportunity to gain access to the exciting long-term growth potential of US smaller companies. Please note, smaller companies tend to be higher risk than their larger counterparts.

Fund review

Donald Trump’s surprise US election win last November was followed by initial sharp falls in stock markets across the world. The falls were relatively short-lived with the US market closing higher when it became clear Trump had been victorious. Despite some of his more controversial ideas the new President is broadly seen as pro-business, with the aim to boost America’s growth.

It is too early to tell exactly what his presidency will bring, but Lauren Romeo is optimistic on his ability to have some positive impact on the US economy. That said, she doesn’t make investment decisions based on the economic or political outlook; and her investment approach will not change under a Trump presidency.

In recent years the manager's ‘value’ style of investing has been out of favour. Instead investors have favoured ‘growth’ companies that have more stable and predictable growth prospects. Similarly, indebted companies have performed well as the low interest rate environment has allowed them to service debts at ever cheaper rates; companies that Lauren Romeo generally does not invest in. However the manager’s value style came back in to favour in the latter part of the year.

In 2016 the fund’s bias to the industrials and IT sectors boosted performance. SAIA, an interstate trucking company, and Mentor Graphics, a multinational supplier of electronic design automation tools performed particularly strongly. The fund has limited exposure to biotech and healthcare stocks because the manager feels these are speculative investments, with small companies in this sector producing lower revenues. Low exposure to this sector proved beneficial over the last 12 months as the sector fell sharply over fears Hillary Clinton, if elected would introduce drug price regulation.

The fund’s investments in the financial sector, consisting largely of asset management companies including Lazard, dragged on performance. The manager retains her conviction in these investments and feels that their current share prices are not reflective of their true value. For instance, Lazard has significantly improved its cash flow, something the manager feels the market is yet to recognise. Donald Trump is also expected to ease regulation, which could benefit the sector.

Annual Percentage Growth
Dec 11 -
Dec 12
Dec 12 -
Dec 13
Dec 13 -
Dec 14
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Legg Mason IF Royce US Smaller Companies 4.6 26.6 6.6 -7.3 50.1
Russell 2000 11.2 36.2 11.4 1.1 44.7
IA North American Smaller Companies 7.5 36.4 9.6 2.5 39.9

Past performance is not a guide to the future. Source: Lipper IM to 31/12/2016

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Fund research

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