Deconstructing the global equity sector

Global equity funds are, increasingly, the bedrock of a stock market portfolio. Done well, they provide access to a carefully curated selection of the world’s best companies in one ready-made portfolio. However, it’s worth noting that they come in a wide variety of flavours. The sector is a melting pot of different strategies and specialisms and investors need to pick with care.

Each fund in the sector will slice and dice global stock markets in slightly different ways. Some funds will be suitable for the core of a portfolio, while others are better seen as a booster rocket for higher returns, but with potentially higher risk. Among our Elite Rated funds we see four broad groupings – generalists, innovation seekers, small and mid-cap focused, and responsible funds.

The generalists

These are funds that are more appropriate for the core of a portfolio. These are traditional, stockpicking global equity funds, run by skilled managers. They are usually concentrated, focused on a relatively narrow range of best ideas, built in partnership with companies’ analyst teams.

The BlackRock Global Unconstrained Equity fund is run by experienced managers Alister Hibbert and Michael Constantis. It takes a ‘buy and hold’ approach, avoiding all benchmark constraints. It aims to back exceptional businesses with a strong pipeline of growth, drawing on the best ideas of BlackRock’s well-resourced analyst team. The fund tends to focus on larger capitalisation companies, with ASML, Microsoft and Novo Nordisk among its top holdings*.

CT Global Focus is another concentrated best ideas fund. Manager David Dudding has a smaller companies background, but the fund is predominantly invested in larger companies, including Microsoft and Nvidia* and leans towards quality growth companies. Lazard Global Equity Franchise also focuses on large-caps, and looks to avoid more cyclical areas. It invests in 25-50 stocks, avoiding areas such as banks, financials or commodities, where margins are low or earnings visibility poor. The fund currently has a high weighting in healthcare and consumer discretionary companies**.

A final option would be the T. Rowe Price Global Focused Growth Equity fund. This is another fund with a large analyst pool feeding in stock ideas. It is technology-heavy, at around 30% of the fund, with holdings in Nvidia, Microsoft and Amazon*.

Innovation seekers

These are a range of funds that aim to seek out structural growth themes in the global economy, and then look for companies that are likely to benefit. These managers believe this is a way to identify companies best-placed to thrive in a dynamic global economy. These funds are often punchy, and higher risk than many of their peers, but can uncover exciting companies at an earlier stage.

In practice, these themes don’t vary very much, and will include areas such as healthcare, artificial intelligence, or the energy transition. These funds will tend to have more exposure to high growth areas such as technology.

Capital Group has run their New Perspective Fund strategy for more than 50 years. Manager Jody Johnsson says the dominant sectors have changed over the years – “decade by decade, we’ve had different themes in the portfolio. In the 1970s, when it was founded, we had a lot of energy and materials. In the 1980s we had computer hardware; in the 1990s it was about telecoms…In the last decade it has been about the internet, e-commerce, digitisation and now, of course, artificial intelligence. But these themes have bubbled up, one stock at a time.”

IFSL Marlborough Global Innovation invests largely in technology and technology-related companies, often at the smaller capitalisation end. Manager Guy Feld says he wants to find companies at the “forefront of waves of change reshaping the way we live and work”. Baillie Gifford Global Discovery invests in ‘immature, disruptive’ companies in areas such as biotechnology, software, or technology platforms. Morgan Stanley Global Brands is built on the premise that a strong brand delivers a persistent advantage. It holds groups such as Microsoft, Visa, and RELX*.

Small and mid-cap specialists

Global small and mid-cap funds have been unloved over the past two years. Investors have taken the view that smaller companies remain uniquely vulnerable to rising interest rates and economic fragility. This may have been true in some cases, but many smaller companies have continued to be operationally sound, and to deliver high and consistent earnings growth.

Valuations now look extreme, with the MSCI World Small Cap index trading below the MSCI World index (a forward p/e of 17x versus 18.7x)***. Historically, small-caps have traded at a premium because of their stronger growth prospects.

This means global smaller companies may be a fertile place to hunt for opportunities at the moment. The team at abrdn has a rich history and well-established investment process. We rate the abrdn Global Smaller Companies and abrdn SICAV I – Global Mid-Cap Equity funds.

Professional investor? Read ‘Why are we all waiting for the small-cap influencer?’

Responsible approach

The global equities sector is also home to a range of responsible equities funds. Again, these will vary in their approach. Some ‘impact’ funds only target companies that are striving to do good. This will give investors a good bang for their buck on carbon emissions and other metrics, but can make the funds quite volatile and vulnerable to the performance of a handful of sectors. High profile problems in areas such as offshore wind have knocked performance more recently.

More generalist funds will exclude specific areas, such as tobacco or armaments, or will seek to engage with companies to ensure they are following the right path. Some will even invest across all sectors, but only in the ‘best in class’ companies.

These pragmatic options include the CCLA Better World Global Equity fund. CCLA believes that legislation, regulation and changing societal preferences will impact negatively on unsustainable business models. The fund screens out companies that score poorly on financial and ESG standards. Its top holdings include Microsoft, Amazon and TSMC*. The Liontrust Sustainable Future Global Growth and CT Responsible Global Equity funds are both generalist funds with strong track records.

Read more: the intersection of global equities and sustainability

The message with the global equity sector is that investors need to be aware of what they’re getting. If they are looking for a core fund, an innovation-focused option may bring too much volatility. But if investors want higher growth, the sector has options for that too. The sector has something for everyone, which is great as long as investors find the right one for them.  

*Source: fund factsheet, 31 March 2024

**Source: fund factsheet, 29 February 2024

***Source: MSCI index factsheet, 29 March 2024