Investec Global Special Situations, Aubrey Global Conviction and Lindsell Train Global Equity are among some of the most volatile global equity funds to have achieved the best returns while exhibiting the lowest correlation to the MSCI All Countries World index over five years, research from FE Trustnet shows.
This follows an article published last week, which looked at the volatile UK equity funds to have made the most active bets relative to the FTSE All Share over the same time frame.
The study was initially inspired by comments from Adrian Lowcock, investment director at Architas, who said investors should remind themselves that a fund’s volatility can be to the upside as well as to the downside. He also said volatility, when used in conjunction with other metrics, can be a good indicator of how active the manager really is.
With this in mind, we turned to the IA Global and IA Global Equity Income sectors and ran the five main metrics used to quantify the active bets a manager takes outside of the MSCI AC World index over five years.
To create our list, we filtered through to the funds which are in the top two quartiles for their alpha generation (which measures over- or underperformance in comparison to the benchmark), beta (which estimates a fund’s volatility in comparison to its benchmark) and information ratios (which assesses the degree to which a manager uses skill and knowledge to enhance the fund returns) over this timeframe.
We also ensured each fund was in the bottom two quartiles for their r-squared ratios (which indicates how closely correlated a fund is to an index) and tracking error (which measures the standard deviation of a fund’s excess returns over the returns of an index).
Of course, we also only looked at the funds in the bottom two quartiles for their annualised volatility over five years in order to find the managers which, while perhaps not best-suited to the more cautious investor, have rewarded investors with long-term time horizons.
We were left with a total of 10 funds, which are shown in the below table:
Source: FE Analytics
The most volatile of these is Aubrey Global Conviction, which is £38m in size and has been headed up by Andrew Dalrymple since 2007. As its name suggests, the fund has a high-conviction portfolio which consists of 38 stocks. Some of its largest individual weightings include mortgage lender Indiabulls Housing Finance, Tencent and Canadian e-commerce company Shopify.
Over five years, it has returned 124.78 per cent compared to its average peer’s return of 88.71 per cent, its MSCI World benchmark’s return of 109.07 per cent and gains from the MSCI AC World of 102.32 per cent.
Over this time frame, it has an alpha generation of three which means that, if the MSCI AC World were to return nothing, it would have made gains of 3 per cent. It also has an annualised volatility of 12.82 per cent compared to the index’s volatility of 9.66 per cent.
Next up with an annualised volatility of 11.43 per cent is Michael Lindsell, Nick Train and James Bullock’s five FE Crown-rated Lindsell Train Global Equity fund.
The £3.2bn vehicle also has a highly-concentrated portfolio, with its three largest holdings – Unilever, Diageo and Heineken – each accounting for more than 7 per cent of the overall fund. The managers select high-quality growth stocks with strong brands and sustainable earnings streams.
Investors should note that the fund only invests in developed market equities, which could be one of the reasons why it has the highest alpha generation on the list at 6.36.
Over five years, it has beaten its average peer and the MSCI AC World index, which includes emerging markets, by 74.33 and 60.72 percentage points respectively with a total return of 163.04 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Other funds on the list which only invest in developed markets include Rathbone Global Opportunities, FP Russell Investments International Growth Assets and, in the IA Global Equity Income sector, Newton Global Income.
Unsurprisingly, two global equity funds with value mandates also made it onto our list. Of these, the fund with the highest alpha generation relative to the MSCI AC World index at 4.54 is Investec Global Special Situations.
The four crown-rated fund is headed up by Alessandro Dicorrado and Steve Woolley, although investors should note they have only been at its helm since the start of last year, with the fund managed from 2007 to 2016 by Alastair Mundy and Mark Wynne-Jones.
The managers aim to provide long-term growth through stocks they believe to be undervalued because overall investor sentiment is weak towards the market area in question. Examples of its largest holdings include Bank of America, Microsoft and Citigroup.
Given its contrarian approach, the fund has a five-year annualised volatility of 10.94 per cent and an alpha generation of 4.54.
Over this timeframe, it has returned 125.46 per cent compared to its average peer and benchmark’s respective returns of 88.71 and 102.32 per cent.
The other value fund on the list is the five crown-rated M&G Global Recovery fund, which has a relatively diversified portfolio of 82 holdings.
Manager David Williams looks for companies which have undergone short-term difficulties but have a good management team and are making a conscious effort to improve shareholder returns. Its largest current holdings are pharmaceutical company Hutchison China Meditech, Danish jewellery manufacturer Pandora and Citigroup.
Over five years, M&G Global Recovery has returned 96.18 per cent which means that, while it has outperformed its average peer by 7.47 percentage points, it has slightly underperformed its MSCI AC World benchmark which is up 102.32 per cent over this time frame.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Other volatile funds to have made the list for their actively-managed portfolio bets include Invesco Perpetual Global Equity, Standard Life Investments Global Equity Unconstrained and Legg Mason IF ClearBridge Global Equity Income.