IMA Global Growth sector outperformed over last year despite economic data pointing to slowdown in growth impetus
Recent economic data points to a slowdown in growth momentum globally, which has created significant volatility in global stock markets.
In spite of this, global growth funds have outperformed over the last year, with the diverse IMA Global Growth sector up 11.5% over 12 months to 23 August.
Surprisingly, small-cap global funds have proved the most effective shelter from market movements, with McInroy & Wood Smaller Companies the top one-year performer, up 28.8%. The worst performer over one year is Allianz RCM Global EcoTrends, down 8.8%.
Funds within the sector must invest at least 80% in equities, with no more than 80% in UK assets.
Invesco Perpetual manages six funds within the sector, including the second best one-year performer, Global Smaller Companies, which has gained 24.4%.
Invesco Perpetual’s head of global equity products Nick Hamilton says: “What we are now seeing is unrealistic expectations for recovery in some of the cyclical companies being pulled back.
“But as a general comment we do not feel equity markets are expensive around the world right now.”
Hamilton adds: “In some areas, there is going to be an incredible amount of bad news, but high quality companies around the world are looking very cheap both from an absolute perspective and also relative to bonds.”
He says the Dow 30 Industrial Average index, which lists 30 of the biggest companies in the world including McDonald’s, Hewlett-Packard, Proctor & Gamble, and Johnson & Johnson, shows earnings and dividend yields far in excess of bonds yields.
“We think on a number of measures global blue chips are trading at very attractive valuations. Economically, there are areas of real growth and a lot of that is coming out of the fast growing Asian economies,” Hamilton says.
He says IP Global Smaller Companies has delivered strong performance over the last year through a combination of strong stockpicking and asset allocation.
“We rotated the fund heavily towards Asia and emerging markets, which meant that around 30% of the assets were sitting across Latin America, emerging Europe and Asia ex Japan, and these stocks have performed exceedingly well,” Hamilton says.
He adds: “The beauty of small-cap investing, particularly in emerging markets, is you can gain exposure to themes inaccessible for a large-cap or big global equity fund.”
M&G manages five funds in the sector, including Global Growth. The £896m vehicle, which has been run by Greg Aldridge since April 2007, is ranked 13 out of 167 funds over three years, up 13.5% compared to a sector average fall of 3.6%.
The manager admits the recent negative US data in particular suggests a low global growth outlook. However, he says it is still possible to find companies that will be worth more over a five-year period.
Aldridge says: “This is not just because they create a lot of value but also because there are growth opportunities that have nothing to do with the overall GDP growth rate in the US or UK or anywhere else.
“These companies can be in the US or UK as well. It is just they operate around the world,” he adds.
Aldridge says if investors worry too much about the US, they may miss the fact emerging markets are continuing to grow at a very rapid pace.
“You can find companies that happen to be listed in the UK or US with emerging market exposure, such as Colgate, 3M, and G4S,” he says.
“These are very good, solid long-term businesses which generate high returns, create a lot of value and have good growth drivers.”
Aldridge says it is not just about emerging markets and their growth. The market is growing because people are using things for the first time.
“I own a mobile telecoms company in South Africa called MTN, which plays on the emerging markets theme, but it is not necessarily about economic growth, it is about usage growth,” he says
“They are based in South Africa, which is pretty fully penetrated for mobile phones but that is not the whole story. The story is around Nigeria and Iran, where there is much lower penetration.”
He says G4S also has a strong position in Africa and India. G4S has around 600,000 employees around the world but over 100,000 are in India.
“This is a company that has been operating in India for over 20 years,” he says.
“Emerging markets have spent a lot less money on security than we do in the developed markets, and that is going to grow over time. So that is a great growth driver coming from emerging markets.”
Newton’s £1.17bn Global Higher Income fund is another consistently strong performer, ranked 17th over three years, up 12.4%.
Charlotte Ryland, Newton’s global equities portfolio manager says: “We have been reasonably negative on the Western economies for some time. We have always been quite sceptical that the huge bounce we saw in activity in markets last year would be sustainable.
“We felt a lot of the problems that emerged from the build-up of debt over the last five years would take a long time to sort out, both in terms of consumers and governments.”
Ryland says Newton does not expect a collapse from markets “but probably mediocre returns.”
“Therefore, what is going to be important is which stocks you pick. There will be companies which will grow in that environment, and you have to be selective in what you own,” she says.
Ryland says Global Higher Income has delivered strong performance because Newton is thematic as a house, and focuses on long-term generators of value.
“We have been very interested in emerging markets, for example, and Chinese consumption in particular. Some of the retailers we own as part of this theme have done particularly well, “she says.
But performance has also been driven by some of the more stable growth companies in the West, which Ryland says are cheaply valued at the moment.
“We have owned companies like Coca-Cola, for example, which are growing their businesses in emerging markets but have got a reasonably stable business in the West as well,” she says.
“They are not being priced on a particularly high multiple at the moment, and are still offering an attractive yield.”
Ryland says Millicom, an emerging market telecoms provider, has been a particular strong performer.
“We have been pulling money back from this stock and investing in some other areas like healthcare where the markets still seem to be very pessimistic about their prospects,” she says.
“But in terms of the overall structure we are still very keen on healthcare and telecoms, and stable areas of the market, and pessimistic about the prospects for financials. We still think they are challenged in terms of the regulatory outlook.”
