Despite the IA Global sector being seen as an area where active funds struggle to add value, research by FE Trustnet has found that several of its members have strong track records in avoiding the worst falls of the market.
Markets have been surprisingly calm over the past year or so, with events such as the UK’s negotiations to leave the EU, stand-offs over North Korea’s nuclear weapons and missile development programmes, and rising inflation failing to prompt a sustained sell-off in global indices.
However, some analysts are warning that this calm period will not last forever. The first Bank of America Merrill Lynch Fund Manager Survey of 2018, for example, recently said that high allocations to equities, high profit expectations and tighter monetary policy suggest a “spike in volatility” could be seen by the end of the quarter.
For those investors interested in funds that have a strong record in avoiding the market’s falls, we looked at the IA Global sector to see how its members’ maximum drawdowns compare with the those of the MSCI World. To do this, we compared maximum drawdowns of the index, sector average and the individual funds in the 60 quarterly periods of the past 15 years.
Quarterly maximum drawdown of IA Global sector and MSCI World over 15yrs
Source: FE Analytics
The above chart, which shows the quarterly maximum drawdowns of the IA Global sector and the MSCI World, reveals that the average global equity fund has tended to sell-off pretty much in line with the index over the period examined but did much better in the midst of the financial crisis.
FE Analytics shows that the average IA Global member has posted a lower maximum drawdown than the index in 32 of the 60 quarters we looked at in this research, while its largest quarterly maximum drawdown has been 14.11 per cent – better than the MSCI World’s 17.39 per cent fall.
But it must be kept in mind that the performance of the average fund does not reflect how all individual funds fare. Looking at the sector on an individual fund level highlights the strategies with the best track records of avoiding the index’s drawdowns.
The below table shows the 30 IA Global funds with the strongest track records in falling less than the MSCI World. In order to make sure that the losses of the global financial crisis are included in the research, we only looked at funds that have histories going back 10 or more years.
At the top is the £334.96m Seilern Stryx World Growth fund, which holds five FE Crowns for superior performance in terms of stock picking, consistency and risk control over recent years. It is managed by Seilern Investment Management chief investment officer Raphael Pitoun and is in the sector’s top decile over three, five and 10 years.
A look at the fund’s objective suggests reasons why it has been hit less hard by falls in the market: it tends to invest in ‘safer’ areas of the market, aiming for “outstanding absolute returns with moderate risk by investing in OECD country companies of highest quality with proven track records, sound financials and predictability of future earnings growth”.
In terms of positioning, Seilern Stryx World Growth has just over 60 per cent of its assets in the US with 10.6 per cent in eurozone stocks and 7.74 per cent in Danish companies. Top holdings include Mastercard, Estee Lauder and Dassault Systemes with the largest sector exposures being information technology, healthcare and consumer discretionary.
Source: FE Analytics
A number of other generalist IA Global members can be found on the list, including larger names such as Andrew Headley and Charles Richardson’s £2.5bn Veritas Global Focus fund, James Thomson’s £1.2bn Rathbone Global Opportunities fund and the team-managed £1.1bn BNY Mellon Long Term Global Equity fund.
However, some global equity funds that invest in small companies or focus on more specialist areas of the market have also built a good track record in avoiding the maximum drawdowns seen in the MSCI World index.
McInroy & Wood Smaller Companies and Schroder ISF Global Smaller Companies, both of which are in the IA Global sector’s top quartile over three-, five- and 10-year time frames, are examples of funds that haven’t dropped as hard as the index on a consistent basis despite looking at the lower end of the market. However, this does not mean they are always stronger than the index and the fact they are small-cap portfolios means they will be riskier than the index at times.
When it comes to specialist strategies, names such as Fidelity Global Consumer Industries, Pictet Water, Morgan Stanley Global Brands and Pictet Security have fewest quarters of being hit with bigger drawdowns than the MSCI World. As with small companies, however, it must be kept in mind that these strategies do come with their own risks.
Of course, not every global fund has tended to post a lower quarterly maximum drawdown than the index. At the very bottom of the table is First State Global Resources, which has only outperformed the MSCI World in 28.6 per cent of the quarters in its track record.
Quarterly maximum drawdown of funds and MSCI World over 15yrs
Source: FE Analytics
In keeping with the fact that commodities and energy have suffered over recent years, funds such as Pictet Clean Energy and Schroder ISF Global Energy also appear at the bottom of the list.
Likewise, funds such as Sanlam Global Financial and Fidelity Global Financial Services can be found near the bottom due to the fact that the companies they focus on remained out of favour for a significant period of time after the global financial crisis.