Global funds to weather a ‘Brexit’ tantrum

This week I was asked an interesting question by an 80-20 Investor member. To paraphrase, the member wants to steer clear of UK equities until after the UK Referendum for fear of an equity market sell-off should the electorate vote to leave the EU. The member already held the global funds highlighted under the Best funds by Sector section at the time. However, they wanted to diversify their portfolio further into even more global equity funds, hence their request for additional suggestions.

Global funds aren't very global

The question raises another very interesting question of 'how global are global funds and how well diversified are they?' The answer to that question is 'not as global or as diversified as the sector name suggest or investors think they are'.

To prove this I analysed all the unit trusts within the Global sector (of which there are 187) to ascertain their geographical mix. It was a lengthy process but In doing so I was able to produce the typical geographical allocation for the average global equity fund, as shown in the table below:

 

Region	% weighting to each geographical location
North America	43%
UK	15%
Europe ex UK	13%
Japan	7%
International	5%
Pacific Basin	3%
Europe	3%
Money Market	2%
Global Emerging Markets	2%
Asia Pacific	2%
Not Specified	1%
Asia	1%
Australasia	1%
Americas	1%
Middle East/ Africa	0%
Continental Europe	0%
South Africa	0%
Europe & Middle East	0%
European Emerging Markets	0%

 

A lot of investors will be shocked to see that most global funds are really quasi diversified US equity funds. That diversification often just amounts to buying UK and European shares. So what does this have to do with the UK's EU Referendum?

This week I met a number of investment managers in the City of London who run billions of pounds of client money. The EU Referendum was a hot topic but what became apparent is that none of them would be drawn on the likely outcome of the vote (although there was a sense that we would vote to remain in the EU). Furthermore the funds managers weren't sure how the markets would be impacted or how individual asset types would perform before, during or after the Referendum. One area where you will almost certainly see some significant volatility will be in currency markets. The pound has already weakened significantly against the dollar and the euro and most of the market is still shorting sterling as an insurance policy ahead of the Referendum. Yet don't be surprised if we see sterling strengthen if the electorate vote to stay in the EU.

The upshot is that it is difficult to predict how the market will react in the short term, so making wholesale changes as part of a damage limitation exercise might yet prove futile. The ultimate insurance policy is to hold cash if you are nervous. Yet on the face of it limiting UK equity exposure seems as sensible an option as any. While we can only speculate, should the electorate vote to leave the EU then it will have significant repercussions for the EU as a whole. Other member states have already made noises that they too would hold referendums should the UK vote to leave. This could see European equity markets also wobble if the UK votes to leave. It seems a prudent strategy might be to not overexpose your portfolio to UK or, to a lesser extent, European equities in the short term, which I have been vocal about when making the recent changes to my £50,000 portfolio.

However, most global funds have around 15% of their assets invested in the UK so choosing a global fund to weather the Referendum should perhaps be seen more as a diversifier rather than a complete exit from UK equities. On a positive note though, as most global funds have the majority of their money invested outside of the UK and Europe with an excessive focus on the US then this could be their chance to shine.

The 80-20 Investor algorithm selection

Interestingly the 80-20 Investor algorithm has already been reducing the UK equity exposure within the Best of the Best Selection, so much so that April's latest selection has no direct UK equity exposure at all. To provide a latest (and slightly extended) shortlist of global funds to choose from I ran the 80-20 Investor algorithm on the Global sector as well as the Global Equity Income sector. The funds that were highlighted as having momentum are shown below.

 

Name	Sector	ISIN Code	1 month return	3 months return	6 month return	Max weekly fall in last 6 months	Ongoing charge
Fundsmith - Equity	Global	GB00B4Q5X527	4.49	13.83	19.25	-4.04	1.07
Stewart Investors - Worldwide Leaders	Global	GB0030978612	5.29	15.79	16.8	-3.83	1.79
Investec - Global Franchise	Global	GB00B7WN9P32	4.38	11.85	16.02	-4.71	1.61
Stewart Investors - Worldwide Equity	Global	GB00B45T6015	5.35	15.06	15.34	-3.86	1.96
First State - Global Listed Infrastructure	Global	GB00B24HJC53	4.46	18.48	14.76	-6.88	1.59
Fidelity - Global Enhanced Income	Global Equity Income	GB00BD1NLL62	4.13	11.02	15.35	-4.21	1
BlackRock - Global Income	Global Equity Income	GB00B3R9X560	3.77	12.33	13.63	-4.59	1.68
Aviva Inv - Global Equity Income	Global Equity Income	GB0030441918	3.74	9.86	10.26	-8.93	1.65
Sarasin - Global Higher Dividend	Global Equity Income	GB00B13GWH22	3.65	10.32	10.14	-7.63	1.74

 

I then analysed each of the funds to show how their assets are invested geographically. The numbers in each column represent a percentage figure.

 

	Fundsmith - Equity	Stewart Investors - Worldwide Leaders	Investec - Global Franchise	Stewart Investors - Worldwide Equity	First State - Global Listed Infrastructure	Fidelity - Global Enhanced Income	BlackRock - Global Income	Aviva Inv - Global Equity Income	Sarasin - Global Higher Dividend
Americas		2.3		7.61	3.7
North America	57.5	28.2	49.7	24.07	60	34.45	51.73	49.9	44.8
Asia Pacific		3.6		3.03
Pacific Basin		4.1		4.51	7.4		3.33		5.6
Australasia				1.07	5.6	3.42	2.1
Japan		5.2	5.5	4.24	4.4	6.88	2	5.4	5.5
Europe								27
Europe ex UK	12	24.3	15.9	20.68	10.6	23.6	19.1		22
UK	24.6	13	18.5	13.32	5.6	10.74	17.34	13	20.4
Global Emerging Markets			1.6						1.7
International						4.51
Middle East/ Africa			2.2	0.93
South Africa		3.8		2.61
Cash	5.9	15.5	6.6	17.93	2.7	16.4	4.4	4.7

 

Perhaps it comes as no surprise that the Stewart Investors funds has had the lowest downside risk of all the funds given that it has around 17.93% in cash. You will also notice that there are some familiar names in the list such as Fundsmith Equity which regularly features in the Best of the Best funds selection as well as being one of the key funds in my own portfolio. However, it does have the largest exposure to UK equities of those funds shortlisted. With the average global fund having 15% UK equity exposure and 13% European equity exposure, as mentioned earlier it is only the First State - Global Listed Infrastructure fund that is relatively underweight in both areas compared to its peers.

Global fund with no UK equity exposure

Yet for those looking for a short term global solution with no equity exposure there does exist a passive option which the 80-20 Investor algorithm ranks just outside of the above shortlist, namely Vanguard FTSE Developed World ex UK Equity Index (ISIN GB00B59G4Q73). The fund is also incredibly cheap with an annual charge of just 0.15%.

The fund has the following asset mix:

 

Area	% allocation
North America	64.57
Europe ex uk	18
Japan	10.1
Pacific Basin	3.7
Australasia	2.9
Cash	0.43
Middle East	0.3