A share of world profits

Global equity funds are often ignored by multi-managers and private bankers. This is partly for performance reasons and partly because multi-managers can often gain more control over asset allocation through using specialist funds.

A common complaint from asset allocators is that very few global equity funds consistently outperform their benchmarks or indeed match the track records of specialist funds.

This is attributed to the difficulties faced by a global equity team in knowing about every region and sector in the world. This is despite the fact that some asset managers say their global equity funds incorporate the best ideas from each of their regional desks. In this way, funds should outperform because they reflect the best stocks from around the world. But many multi-managers still argue it is better to allocate money to specialist regional managers.

‘Too many markets’

David Williams, fund manager at Insinger de Beaufort, shares the view that global equity managers “have too many markets to cover”. Insinger uses specialist managers, which Mr Williams argues gives flexibility over the use of styles such as growth and value.

Following the three-year bear market from March 2000 to March 2003, global equity funds have enjoyed a recovery. The S&P Global 1200 index returned 10.41 per cent in the year to 1 June. The average global equity fund sold in Europe returned 9.5 per cent, despite double figure negative numbers over three and five years.

But there are concerns about the recovery’s sustainability. Some managers argue that US shares are over-valued and that the twin deficits in the US may necessitate tax rises and reduced government spending, with consumer spending slowing as interest rates rise. An economic slowdown in China would have a knock-on effect around the world and continued oil price rises would spark inflationary pressures.

This is the most pessimistic scenario. But private client houses are nevertheless taking more defensive positions in global portfolios. “We see little more upside from the equity markets and the risks are increasing,” confesses Mr Williams.

Vigilant distributors, however, can still access outperforming global funds such as the ACMGI Global Growth Trends fund, managed by Dan Nordby, senior portfolio manager at Alliance Capital Management (ACM).

In the five years to 1 June 2004, the fund returned 8.1 per cent compared to –14.2 per cent for the S&P Global 1200 index and –15.9 per cent for the average global equity fund. Over one year to 1 June 2004, however, the fund returned 9.45 per cent against 10.41 per cent for the index and a 9.5 per cent sector average.

The fund takes a bottom-up approach by analysing future earnings growth of companies.

Sector teams

ACM has more than 63 equity analysts around the world who follow 1200 of the world’s “fastest growing companies”. The analysts are split into six sector teams – technology, healthcare, consumer spending, energy, finance and infrastructure – and each team is managed by a senior sector analyst.

The best ideas from each sector are put into the global equity fund, which comprises between 100 and 150 stocks. The sector teams meet once a month to share their ideas. An oversight team then ensures the portfolio does not have an overweight position in a geographical market or a sector weight that the teams are not comfortable with.

Mr Nordby believes the recent recovery in global stock markets is sustainable. “There are a number of positive signs. There are very strong liquidity flows worldwide, low inventory to sales ratios while corporate profits and free cashflow are at an all-time high in the US.”

He believes the US economy will grow 5 per cent this year against a forecast of 4 per cent, the eurozone will expand 2.5 per cent, Japan 3 per cent, Latin America 3.5 per cent, Asia ex Japan 6 per cent and emerging Europe 4 per cent. And ACM expects this growth to extend into next year.

But there are also uncertainties, believes Mr Nordby. “Will central banks around the world be able to raise interest rates fast enough to cool growth but not too fast to choke off the recovery?” He asks. “And how will the US government pay off its budget deficit without damaging economic growth?”

The most outstanding performance has been delivered by the Socgen International Sicav fund. Over five years, the fund has returned 98.38 per against –14.2 per cent for the S&P Global 1200 index and –15.9 per cent for the average global equity fund.

This phenomenal return followed four years of underperformance between 1996 and 1999, according to the fund’s manager, Jean-Marie Eveillard.

He attributes this underperformance to the fact that he would not buy “overvalued” technology stocks. He admits it was hard to stand away from the crowd and investors redeemed money from the US domiciled version of the fund. US assets shrunk from $6bn (E5bn) in 1997 to $2.5bn in spring 2000. But following the outperformance, the US fund now has $15bn in assets. The Luxembourg based fund has also grown rapidly, now managing more than €1.21bn.

Société Générale Asset Management (SGAM) has closed the fund to new investments because “it is hard to find stocks with value anywhere in the world,” says Mr Eveillard. Indeed, he says “it is harder to find good value stocks than at any time since 1979.” This has prompted him to put 12 per cent of the fund into cash.

Special situation

SGAM sees more attractive valuations in Europe than the US, while Japan is a special situation because it has suffered a 12-year bear market. “The artificially low interest rates in the developed world have pushed up the price of all asset classes in the past 12 months, which has made it harder to find value.”

One stock favoured by Mr Eveillard is Samsung, the fund’s third largest holding, trading at eight times earnings. He describes his approach as a stock picking value manager who holds companies for an average of five years. “My approach is somewhere between Benjamin Graham and Warren Buffett.”

Murdo Murchison, manager of the Templeton Growth Euro fund, has also outperformed both the stockmarket and the average global equity fund over the past one and three years. His fund has returned –3.45 per cent over three years against –23.27 per cent for the S&P Global 1200 index and a –25.8 per cent sector average.

Despite the name, Mr Murchison says the fund takes a value approach to investing, like the Socgen International Sicav. He says that even when stocks appear to have high price to earnings ratios, they may still offer value.

He cites BHP Billiton in the past and Pfizer, now on 17 times earnings. Mr Murchison also buys out-of-favour companies which he believes will recover. Last year, he chose Reuters and Time Warner. He bought Reuters at £1.60. It is now priced at £3.72.

High dividend yield is another factor in Mr Murchison’s choice of stocks. He cites GlaxoSmithKline, which trades at 13 times earnings and yields a 4 per cent dividend; Shell, trading 12 times earnings, yielding 5 per cent; and BP, trading 15 times and paying 4 per cent.

Lucy Macdonald, manager of the huge Allianz Dresdner Global Equity Growth A fund, is cautiously optimistic about the outlook. She says corporate profits in the US are recovering and this will spread to the rest of the world, with equities fairly priced against bonds. “Low interest rates will benefit equities relative to bonds, although growth in stock markets will probably be in the single digits this year.”

Her fund is overweight Japan as she believes there is more value in this stock market than elsewhere. And while Ms Macdonald is bullish about long-term prospects for China, she has concerns in the short term. She says there will be some slowing of “economic growth further out. The concerns about inflation, however, have been overdone. There is an oversupply of most goods so inflation is not too much of an issue.” She believes European stock markets will continue to lag other markets, partly because the European Central Bank is less willing than other authorities to spark growth through lower interest rates. “There has been a marginal improvement in Europe but its growth rates are still lagging. Yet European stock markets are relatively cheaply valued.”