Asset allocation, stock-picking and style set the standard

Rising interest rates, higher oil prices and the decline of the dollar are some of the factors making global equity fund managers look at 2005 with caution, according to a report by Standard & Poor’s.

Concerns about the rise in bond yield and slowing corporate earnings are two further factors driving managers to be more cautious about how their funds will be invested for the rest of the year. Over the three months to the end of January, according to Standard & Poor’s, the three main drivers of global equity fund performance were style, asset allocation and stock selection.

Value bias

Alison Cratchley, fund analyst at Standard and Poor’s, says value-biased funds fared better than those focusing on growth stocks. In terms of asset allocation funds, overweighting the Asia-Pacific and emerging markets and underweighting the US produced the best returns. Finally, in the stock-picking area, small and mid caps performed better than large caps.

Ms Cratchley mentions the Carnagie Worldwide fund – which ranked in the top decile of the S&P Global Equities Mainstream sector in the three months to the end of January – as a good example of how style, asset allocation and stock-picking translated into good returns. She says the Carnagie fund gained from its emphasis on high dividend yielding stocks, a high exposure to emerging markets, oil and Japan, and reduced exposure to the US. At a stock level it benefited from strong performance from the likes of BAT, Altria, Petrobas and ConocoPhillips. However, as Ms Cratchley mentions, the greatest single contributor to the performance of the fund over recent months was Indonesian car and motorcycle conglomerate Astra International.

“Some of the performance in global equity funds has come from a higher exposure to what we could call the higher beta markets, such as Asia-Pacific and emerging markets,” Ms Cratchley says. She mentions another top decile ranking fund, the Credit Suisse Multi-Manager Constellation Portfolio fund, as a good example of how asset allocation and fund selection contributed to returns. “Japan, Asia-Pacific and emerging markets represent almost a third of the fund’s portfolio But its co-manager Gary Potter is thinking about reducing Asia and Japan and increasing North America, where the fund has been underweight for a long time, because he thinks a lot of the decline in the dollar has already taken place,” she adds.

“Although there haven’t been many changes in the fund over the last few months, he thinks there will be significant changes in the near future. However, many fund managers are still very happy to be underweight in the US and they are not really thinking about reducing Asia yet.”

Stock selection

Another fund the report focuses on is the Rathbone Global Opportunities fund, which also delivered top decile returns following a stock selection strategy particularly focused on mid and small caps.

Ms Cratchley explains that some managers think that growth and large caps will become more interesting this year. A good example is the Sarasin global thematic fund that has moderated its previous value bias in favour of being slightly overweight in growth. “Many managers think the pendulum is going to swing and that large-cap growth stocks may return to favour,” she says.

The top performing global equity offshore fund over the last year three years was the value-oriented Sparainvest Global Value, a Luxembourg-domiciled fund with just under ?100m under management (see table).