Portfolio Adviser • Portfolio Adviser Magazine February 2022 • Fund selector

The disparity of returns across the global sector during 2021 may have caused concerns but there are still plenty of positives to reflect on, too

IA Global is one of the largest sectors in terms of assets, comprised of around 480 funds. To be included, funds need to have at least 80% of their assets invested in global equities, with exposure diversified by geographic region to avoid qualifying for other regional sectors, such as global emerging markets or Europe excluding UK.'

This quite simplistic rule means the sector hosts a wide range of funds. For example, it includes thematic and single-sector strategies, as long as they have broad geographical exposures. Investors must also be aware that certain global funds fall foul of the above criteria, and so land themselves in the specialist sector.

In April 2021, the IA opted to also include ETFs in the category, and in September 2021, when reorganising and creating some newer sectors, decided against a standalone global smaller companies sector. This would have created an asset class with only approximately 18 constituents, therefore reducing its overall appeal, despite smaller companies sectors existing in other regions.

Therefore, when looking at the IA Global sector and its peer group performance, it is worth remembering it hosts a broad selection of funds with differing opportunity sets and market focuses.

Following the announcement and rollout of the Covid vaccines in November 2020, the global market witnessed a rotation away from growth-oriented companies and Covid beneficiaries into those benefiting from the reopening, such as low-valued and cyclical businesses

This rotation continued into Q1 2021, with value-style funds strongly outperforming their growth peers. However, as the pandemic continued, worries around infection rates still hit headlines and caused this trend to stall somewhat from May, and allowed growth stocks to catch-up.

As the market digested the risk of new Covid variants, inflation reared its head. The reopening of economies unleashed pent-up demand, but supply-chain bottlenecks caused problems, and energy and commodity prices were on the rise.

Though central banks stated their belief that inflation is transitory, the risk is that it will get embedded into expectations and wages, and become more structural.

Against this backdrop, value continued to be supported in late September as US Treasury yields rose. Towards the end of the year, central banks began to react and become marginally less supportive. The US Federal Reserve decided to scale back its bond purchases, and the Bank of England increased its base rate from 0.1% to 0.25%.

However, low interest rates and bond yields still depress the cost of servicing the high levels of debt that have accumulated across the public and private sector. This raised concerns that if central banks excessively tighten monetary policy, it could drive an economic slowdown.

Elsewhere, China’s Communist Party undermined investor sentiment by pressing ahead with its decision to stage clampdowns on some of its most successful businesses. Alongside the country’s zero-tolerance policy towards Covid, this created uncertainty for global investors. At the same time, the world’s most indebted company, property developer Evergrande, balanced on the edge of collapse.

According to the latest headline numbers, US inflation in December, as measured by the consumer price index (CPI), rose by 7%, its largest rise since 1982, and in the UK, the CPI rose by 5.4%, its highest since 1992. With central banks keeping real interest rates and bond yields negative, this continued to make for an unattractive investment. Consequently, equities remained the only major asset class in which investors could hope to achieve a positive real return.

Despite what appeared to be a year with much to digest, the MSCI AC World Index returned 19.6% in sterling terms, largely driven by the US market. At a hefty 61% of the index, the US is expected to be a key driver of the global index. Over the year, the USA Index dominated, and rose 27.6%.

The UK and Europe ex UK regions produced strong absolute returns, however, they lagged behind their western counterpart, gaining 19.6% and 16.7%, respectively. Whereas Japan only appreciated a lacklustre 2.6% with its currency weakening against the pound, a headwind for UK investors, and the emerging markets and Asia Pacific regions ended in losses of -1.6% and -2.0%, respectively.

By sector, while all areas of the market rose, there was a clear dynamic. Cyclically sensitive areas generally outperformed, and defensives generally lagged. The best-performing sector was energy, which rose 37.4%, followed by information technology (28.5%) and financials (25.5%). The laggards were consumer discretionary (10%), utilities (11.2%) and communication services (11.6%).

By style, value stocks marginally outperformed growth stocks, with value doing better during the beginning of the year, and growth generally playing catch-up from May onwards.

Finally, by market capitalisation, largecaps continued to dominate, outperforming mid-caps, which in turn marginally beat small caps. However, the dispersion was quite narrow.

Interestingly, the IA Global sector trailed the global equity markets in 2021, with the peer group rising 17.7%, therefore underperforming by 1.9%. Of its constituents, only around 40% of active funds managed to outperform. Within these actively managed funds, the disparity of returns was also significant. The best performer and worst performer being 48.8% and -20.6%, respectively, once again illustrating the sector’s diversity.

• The Baillie Gifford Positive Change Fund is unashamedly managed in the characteristic Baillie Gifford way. Its managers intend to buy into high-growth companies they believe offer substantial upside over the very long term, as they embrace the asymmetry of returns. However, in addition to this focus, the strategy also intends to hold companies it deems provide a positive impact.

• Luxembourg Selection Active Solar is a niche fund. However, its returns cannot be ignored. As a clear beneficiary of a worldwide need to move away from fossil fuels, which has been accelerated by countries committing to lowering emissions in the race to net zero, this fund invests in solar technology companies and has been rewarded by this trend.

• The PGIM Jennison Global Equity Opportunities Fund has a focus on secular growth trends, with a bias towards consumption growth. This strategy is concentrated and unconstrained, and invests in companies that have sustainable competitive advantages, strong financial advantages and which are deemed by the managers to be the new market leaders.

As we have all witnessed, responsible investment-focused funds have risen in prominence over the past couple of years. Therefore, it doesn’t come as a surprise that of the last 10 fund launches, eight are of this ilk.

• Having only launched in December 2021, the T Rowe Price Global Impact Equity Fund is managed by Hari Balkrishna (pictured), who was previously an associate portfolio manager of the firm’s Global Growth Equity strategy. With his own product, he is seeking to invest in companies intending to make a positive impact on the environment and/or society. This fund aims to be aligned with the United Nations Sustainable Development Goals, with the manager scrutinising each company’s impact by measurability, materiality, additionality and resilience.

• The JPM Global Sustainable Equity Fund invests in companies that its managers deem best-in-class within their respective industries, as well as being industry leaders in sustainable outcomes. ESG is integrated into the process as it is aiming to identify companies with strong or improving sustainability characteristics.

• Baillie Giford Climate Optimism, as its name indicates, is focused on climate. It is understood the fund is currently being incubated by Baillie Gifford, investing in smaller and early-stage companies that its managers believe can provide innovative technology that will be key in the battle to tackle climate change. It is still early days for the strategy but it could be of interest for avid fans of Baillie Gifford’s long-term growth investment style.

• A highly favoured and staple UK market global fund, Fundsmith Equity remains the largest active offering in the IA Global sector. Managed by Terry Smith (pictured), it continues to invest in a concentrated portfolio of well-established quality businesses. This fund has produced very attractive absolute returns over time, and in fact 2021 was only the second time it marginally underperformed the market, although with Smith’s long-time horizon, this isn’t something he is aiming to achieve.

• As its name suggests, Pictet Global Megatrend Selection invests with a thematic approach in companies that its manager believes should benefit from global megatrends. In order to diversify, the fund equally weights the portfolio across 12 different themes.

• The investment team behind the Morgan Stanley Global Brands Fund focus on high-quality businesses with strong competitive advantages, high, recurring cashflows and superior pricing power. They believe such businesses can grow over time with a lesser threat of disruption. Investors in this fund should expect a bias towards consumer staples, healthcare and information technology, as these are its natural hunting ground.