A key part of 80-20 Investor is the interaction between members and myself as well as each other. A lot of useful user-generated content can be found within Chatterbox. In this month's Chatterbox one member asked the following question:
Hi Damien
I’ve noticed that global funds have a high proportion of US stocks and their performance charts are very similar to American funds. Why is this ?
Is there a way to get a more even global spread that will be less influenced by the big economies (e.g. US) and have more balanced exposure to all of the world's economies ?
My initial response was:
Part of the reason why global funds tend to be US focused is because of global stock market capitalisation. So US stocks make up a larger proportion of the ‘global stock market’ and therefore funds represent them in those proportions. In addition, there is plenty of research and historical data on US companies which explains why fund managers gravitate towards them. Regulatory differences, logistics, lack of knowledge and expertise are all reasons managers will stick to what they know. Even the incredibly popular Vanguard Lifestrategy funds have their largest exposure in US equities which most investors don’t realise.
Probably the best thing is for me to analyse the Global funds out there and identify the more diversified global funds for 80-20 Investor members. So watch this space.
So this piece of research delivers on my promise. To carry out the research I analysed the holdings of all 192 funds within the global sector.
How is the average global fund invested?
In terms of geography (where the companies that the funds invest in are listed) a typical global fund invests as shown below. I calculated this by analysing where all 192 global unit trust funds currently invest and producing an average for each area.
| Asset type | % invested |
| North American Equities | 43% |
| International Equities | 15% |
| European Equities | 14% |
| UK Equities | 13% |
| Japanese Equities | 5% |
| Asia Pacific Equities | 4% |
| Asia Pacific Emerging Equities | 2% |
| Global Emerging Market Equities | 2% |
| American Emerging Equities | 1% |
| Commodity & Energy | 1% |
The above results would come as a complete surprise to most investors who understandably assume that global funds are well diversified, when in fact most are quasi-US equity funds. The trouble is that while the average US equity exposure is 43% there is little variation across the sector as the chart below shows. Each bar represents a global equity fund within the sector and the height of each bar represents the percentage US equity exposure (click to enlarge). The funds are ordered from the highest US exposure on the left to the lowest on the right. A quick glance at the chart shows you that most funds have at least 30% of their assets in US equities.
In fact if I was to reorder the bars so that this year's top performing global equity funds were on the left and the worst performing funds were on the right then barely any funds would change position. That's because Donald Trump's first year in office has been great for US equities. However, as I pointed out in my recent newsletter, other stock markets, such as those in emerging markets and in particular in Chinese equities, have fared even better. Unfortunately, no global fund manager will make a bold bet on emerging markets (and hasn't), preferring to herd with their peers, which means 2017 has come down to which fund has the most US exposure when trying to outperform one another. Those fund managers who tried to diversify prop up 2017's performance charts as they tended to favour European or UK equities. That doesn't make them bad funds it's just that they are not riding the current performance trends.
The table below shows the asset mix of 5 of the top performing global funds in 2017:
| Name | North American Equities | Asia Pacific Equities | Asia Pacific Emerging Equities | Japanese Equities | European Equities | European Emerging Equities | UK Equities | Global Emerging Market Equities | International Equities | Cash | 1 year return |
| Standard Life Investments Global Smaller Companies | 42% | 2% | 10% | 12% | 20% | 0 % | 12% | 0 % | 0% | 1% | 32.30% |
| Kames Global Equity | 44% | 17% | 0% | 12% | 19% | 0% | 4% | 0% | 2% | 1% | 30.38% |
| Baillie Gifford Global Select | 48% | 2% | 12% | 12% | 12% | 0% | 7% | 0% | 5% | 3% | 28.93% |
| Baillie Gifford Global Discovery | 55% | 8% | 0% | 0% | 12% | 0% | 20% | 2% | 0% | 3% | 28.13% |
| Fundsmith Equity | 62.5% | 0% | 0% | 0% | 17.1% | 0% | 18.5% | 0% | 0% | 2% | 26.24% |
Finding a balance
If you are looking for balance that really means identifying those funds on the far right of the bar chart above. The trouble is that they have also lagged their peers over the last year, but with US equities looking expensive on an historical basis they offer some attraction on a valuation basis. Below I list four of the most diversified global funds along with their performance over the last year. Each has a US equity exposure of 20% or under.
| Stewart Investors Worldwide Sustainability | Stewart Investors Worldwide Equity | Stewart Investors Worldwide Leaders | Fidelity Wealthbuilder | |
| Asset % American Emerging Equities | 4% | 5% | 0% | 0% |
| Asset % North American Equities | 20% | 18% | 17% | 17% |
| Asset % Asia Pacific Equities | 5% | 9% | 5% | 14% |
| Asset % Asia Pacific Emerging Equities | 13% | 8% | 6% | 0% |
| Asset % Japanese Equities | 9% | 5% | 8% | 14% |
| Asset % European Equities | 34% | 21% | 28% | 28% |
| Asset % UK Equities | 9% | 14% | 13% | 22% |
| Asset % Global Emerging Market Equities | 0% | 3% | 5% | 3% |
| Asset % International Equities | 0% | 0% | 0% | 0% |
| Asset % Cash | 6% | 18% | 18% | 2% |
| 1 year performance % | 17.53% | 12.39% | 11.23% | 15.05% |
The annual performance of each of these funds would ordinarily be welcomed by investors but fades in comparison against their US focused peers. Now if we apply our 80-20 Investor algorithm to the sector and focus just on funds with below average US equity exposure then Artemis Global Growth would stand out. It has a 33% exposure to US equities with most of the rest split between Asia emerging equities (24%) and European equities (22%). The fund has previously featured in the BFBS and BOTB tables. The only drawback is that the fund has a bid/offer spread of around 1.3% which makes it unattractive to move in and out of if you are riding momentum. However, it would suit a buy and hold strategy which the original question alluded to anyway.
Final thought...
The above research highlights that global funds are not an ideal one-stop diversified global equity solution, although there are one or two diversified funds. Generally if you buy and hold a global fund then you are buying a quasi-US equity fund and all the risks that entails. A better idea is to build your own diversified portfolio using a range of geography specific equity funds from sectors such as UK, US, European, Asian, Japanese or Chinese equities. If you look at my recent review of my portfolio that's exactly what I've done. Rather than view global funds as a good way of diversifying your portfolio's equity exposure, instead view them as a good way to diversify your US equity exposure while at the same time helping to reduce the number of funds held in your portfolio.
