Investment funds with a Global investment approach have become hugely popular with investors in recent years. These funds are able to pick and choose shares from all regions and sectors, such as UK, Europe, Asia and Emerging Markets with fund managers naturally holding a bigger portion of shares from higher growth markets such as North America.
With an unrestricted mandate, Global funds often achieve higher returns than many funds with a regional-specific mandate. This has helped to bolster their appeal with the hugely popular Fundsmith Equity fund, Lindsell Train Global Equity fund and the Fisher Investment Purisima Global Total Return fund, three of the most popular Global funds on the market.
Combined these 3 funds manage £36.5 billion of investor money, which is approximately 25% of the entire amount invested in all 360 Global funds, and 1.5% of the entire amount held in all 3,000 plus funds classified by industry trade body the Investment Association.
In this report, we assess the performance of the 3 largest Global funds and explore why, despite their high returns when compared to many of the funds within region-specific sectors, they may not always be the best option for maintaining an efficient and balanced portfolio.
The Fundsmith Equity fund is the largest fund in the UK with over £23 billion of client money under its management. Fundsmith’s success is built on a simple investment strategy, which involves taking bold bets on a small number of companies and holding them for the long term, without paying attention to the quirks of a macroeconomy.
This is rooted in Mr Smith’s belief that “nobody is capable of consistently predicting macro events” and that it is more worthwhile to identify good companies, a skill he honed over decades working as an analyst. “You might think every fund manager tries to invest in good companies, but I can assure you they don’t,” he says. “At Fundsmith we have spent a lot of time coming up with a definition of what is a good company.”
Fundsmith invests in mature companies with strong balance sheets and established brands, which are capable of reinvesting their profits and compounding value for investors over time, while excluding cyclical sectors, such as mining and financials.
He avoids companies that require leverage to generate profits, which is why he won’t invest in companies which require borrowed money to function or survive – such as banks.
Terry Smith says that his philosophy of investing in good companies is easier said than done, but he believes most other fund managers don’t do this. “Very few investment managers boast about the fact that they invest in low-quality businesses, but most of them do, often because they consider such businesses as ‘cheap’. They buy these companies because they believe the price to be too low relative to their assets or earnings and then wait for the market to revalue them upwards. This is logical; however, the revaluation will depend on the whim of the market or events which are difficult to predict, such as the business cycle, takeovers, restructuring or management change. So the revaluation might happen quickly, it might take a long time, or it may never happen at all. None of these are particularly good for an investor.
The Fundsmith Equity fund has continually performed well within the Global sector despite various political and economic challenges, and over the past 5 years, it returned growth of 138.44%.
Although a Global fund, 71.70% of the Fundsmith Equity funds assets are invested in US equities, Mr Smith has said this is not deliberate. “We have no bias towards any country, including the US, and are simply looking for the best companies to invest in. We are looking for a combination of high quality and reasonable value, wherever they may be incorporated, headquartered or listed in the world.”
Lindsell Train Global Equity
Like fellow star fund manager Terry Smith, Train subscribes to legendary investor Warren Buffett's mantra of buying good quality companies and holding onto them for a long time. Similar to Terry Smith, Nick Train favours holding a concentrated portfolio of 20 and 35 stocks.
Fundamental to Nick Train’s investment approach is his belief that inefficiencies exist in the valuation of exceptional quoted companies. The companies he seeks out are durable, cash-generative franchises to invest in, the majority of which are from media, pharmaceutical, consumer branded goods and retail financial services sectors.
Once committed to a company, Train is extremely reluctant to sell it, except on a significant breach of valuation targets or when the premise for the investment is no longer valid.
This approach nullifies any temptation to chop and change holdings in an attempt to make a ‘quick win’ by trying to time the market.
The crux of Nick Train's investment philosophy lies in the belief that a highly concentrated portfolio of high-quality, cash-generative, strong, and easily understood business franchises will outperform the market and reduce volatility over the long term.
Purisima Global Total Return Fund
The Purisima Global Total Return fund otherwise known as the (Fisher GTR Fund) is the fund used by Fisher investments as the equity portion of their portfolios. Similar to the Fundsmith Equity and Lindsell Train Global Equity, and indeed the majority of Global funds, the Purisima GTR fund is primarily weighted in North American Equities.
North American equities has been one of the most favoured asset classes as it is home to some of the worlds largest global brands such as Google and Amazon.
The North America sector has consistently been among the highest growth sectors, which has led to investors seeking to capitalise on its high growth by increasing their portfolios weighting in North American equities. However, this increased exposure can amplify risk, and as a consequence, it could have a serious detrimental impact on a portfolio's value should the region experience a fallout.
The Purisima Global Total Return fund has almost 72% of its holdings invested in North American companies, with the next largest country-specific allocation being a 5% holding in companies based in China.
Over the past year, the fund has performed better than Fundsmith and Lindsell Train but over 5-years it has noticeably lower growth.
Why Global Funds May Not Be The Best Option For Investors
Global funds offer investors exposure to a range of assets within one fund. In essence, Global funds act somewhat as a ready-made portfolio that are automatically rebalanced and maintained by the fund’s manager. The two main attractions of Global funds is their convenience and comparatively high returns when compared to many sector or region-specific funds.
In reality, Global funds are not always the best option for investors. With A Global fund, the asset allocation is determined by the fund manager and the shares held within the fund, but not all of these shares are competitive, which will limit the overall efficiency of the fund and impact the quality of the overall portfolio.
We believe a portfolio that is constructed using the appropriate blend of specialist investment funds, each of which fits a specific asset class and is weighted to meet the desired asset allocation model, promotes a better outcome.
This can be a complex process that requires thorough analysis, but the result can be a much more tailored portfolio that offers even greater growth potential and better fits your objectives.
How Global Funds Have Performed
Against a constantly changing world, the most efficient investment outcome is often achieved using a blend of investments across several asset classes. A portfolio of diversified assets can shield a portfolio from the effects of market volatility, beat inflation, and provide long term capital growth as well as a regular income if required. While an overweight position in Global funds can be detrimental to a portfolio, they can still add value if incorporated strategically into a balanced asset allocation model.
The Global funds of Fundsmith, Lindsell Train and Purisima (Fisher Investments) represent the most popular among the sector but there are other Global funds that have performed just as well if not better.