Conal Gregory: In uncertain times, spreading your risk globally may be wise

Watching the market: Warning signs from China, Europe and the US lead some to believe a downturn is overdue. PHOTO: AP Photo/Vincent Thian
Watching the market: Warning signs from China, Europe and the US lead some to believe a downturn is overdue. PHOTO: AP Photo/Vincent Thian

Savers who take a global view are spreading their risk and ensuring diversification far wider than those who restrict their money to one country or even one continent.

This is particularly important if a large part of a portfolio is invested in the UK with reliance on our domestic market. Instead, many a wealth manager would agree with the Victorian poet Robert Browning, who exclaimed that “All’s right with the world!” in Pippa Passes (1841).

A global range can “improve growth prospects as most of the best companies in the world are not listed in the UK,” says Kelly Kirby, Chartered Financial Planner at adviser Chase de Vere in Leeds, part of Swiss Life. Kirby tantalisingly adds, “Most of the companies that will be the winners of tomorrow are not listed in the UK either.”

The twin ways to achieve exposure to global equities and other asset classes are through all-in-one global funds or a combination of more specialised collectives that invest in specific parts of the world.

The former allow savers to achieve a good level of diversification for a relatively small outlay which is perfect for novice investors and accounts for youngsters like a Child Trust Fund.

Consider global funds to buy and hold. They are for long-term planning, such as for a pension or someone who does not wish to be actively involved in monitoring their savings on a regular basis. However, it is vital that the right fund is chosen as they can differ greatly.

With 321 global collectives listed here, some are broad-based and diversified but others focus on specific geographical regions, some are active whilst others are passive (replicating a published index), some invest in individual shares whilst others opt for funds and some select a specific sector, like energy, healthcare or infrastructure.

There is also the ethical approach available.

An experienced manager will adjust country and sector allocations to reflect where the best opportunities lie. Trusting money to a wealth manager and, in turn, to fund managers means that they earn significant fees. In exchange, the investor should not expect a narcoleptic approach.

Darius McDermott from Chelsea Financial Services cautions that global funds have had an extra boost for UK investors as a result of weak sterling. “Should the pound strengthen, global fund returns will be dampened.”

Ensure exposure to the major economic areas of the globe where the leading companies are listed: US, UK, Europe, Asia and emerging markets. For less volatility, place the greatest proportion in Western markets.

The International Monetary Fund downgraded its forecast for world growth last month to just three per cent, the slowest rate since the 2009 recession, and to 3.4 per cent for 2020. It predicts 1.2 per cent growth for the UK and 1.4 per cent next year.

Currently there are warning signs of turbulence from China (including the Hong Kong protests), Germany and even the US with the potential escalation of trade wars between the US and China. Increased tensions in the Middle East, the Brexit saga and the yield curve inversion in the US do not make choices easy.

Pessimists say a world downturn is overdue. With over a decade of growth, the US this year broke the record for its longest period of economic expansion.

If there should be a crisis, central banks cannot cut interest rates dramatically as before. China will not stimulate the West as its growth is at a 30-year low. Corporate debt has reached mega proportions and high-street failures like Thomas Cook continue.

This points to not only invest globally but to extend to other assets, notably fixed interest and property alongside shares.

Fidelity Global Dividend is a fund which invests in large, good-quality companies to secure a sustainable income stream, which is currently 2.8 per cent. It is run by an experienced manager and tipped by Kirby, who also likes Rathbone Global Opportunities for its strong track record. It invests mainly in the US and Europe, seeking under-the-radar and out-of-favour growth companies.

For impressive growth, Guardcap Global Equity is singled out by Saul Fulda, investment analyst at Redmayne Bentley. Although the collective holds only 25 firms, it has large positions in such success stories as MasterCard, Alphabet and UnitedHealth. It returned 16.6 per cent in a year, beating its benchmark – the MSCI World Index – by over five per cent.

For two funds based on larger companies, McDermott tips Fidelity Global Special Situations and Brown Advisory Global Leaders, up over three years by 29.8 per cent and 48.8 per cent respectively by comparison with 25.6 per cent for the benchmark.

Among investment trusts, Fulda recommends Edinburgh Worldwide. This looks for small entrepreneurial and innovative companies that offer long-term growth prospects.

Investment trusts offer several advantages over open-ended funds, including the ability to gear (borrow when an opportunity arises), withhold excess profits to smooth returns, instant pricing (rather than daily or sometimes weekly) and usually independent boards of directors.

For those willing to take a little extra risk, McDermott likes BMO Global Smaller Companies Investment Trust and the ASI Global Smaller Companies fund, which have grown over three years by 21.8 per cent and 35.1 per cent. Both funds have greatly exceeded their benchmark return of 7.3 per cent.

North America accounts for 42.8 per cent in each of these funds. The latter noticeably favours technology and industrials and has 9.9 per cent in Japan, followed by 7.7 per cent in Australasia.

Scottish Mortgage is the behemoth of the investment trust world. Despite its misleading title with no home loans, it has grown to £7,400m capitalisation, making it the 60th largest quoted company.

Recent performance has not been exciting but over longer periods, it has excelled. As a warning, it holds 22 per cent in unlisted firms. Luxury holdings include Kering and Ferrari with high exposure to Tesla, Baidu and Alibaba.

If seeking a passive fund, Kirby suggests the L&G International Index which tracks the FTSE World (ex UK) Index and has a low 0.13 per cent annual charge. Its largest holdings are in the US, notably Apple, Amazon and Microsoft.

An alternative tracker is the iShares Core MSCI World Exchange Traded Fund which gives the saver over 1,600 companies based in 23 countries. The fee is 0.2 per cent.

Finally, consider drip-feeding money on a monthly basis to cut volatility and, unless the dividends are really required, to reinvest in the same fund. To show the effect of this process, the FTSE 100 is up nine per cent over three years but 40 per cent if dividends are taken into account.

Conal Gregory is AIC Regional Journalist of the Year.