A Spin Through the Global Growth Sector

This poorly designed peer group isn't easy to assess. We can help.

Christopher J. Traulsen, CFA 30 July, 2007 | 11:49AM
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The IMA’s Global Growth sector is another example of a very broadly constructed peer group from the local fund trade association. The IMA defines it as funds that invest at least 80% of assets in equities, with no more than 80% in the UK, and with the primary objective of growth of capital. It does not matter if a fund invests primarily in small-, mid-, or large-caps—all funds are lumped together. Such ambiguity is why we think using more precisely defined peer groups, such as the Morningstar Categories can help you make better decisions.

: rgb(204, 51, 51); font-weight: bold;">A Clearer Lens
To help make sense of global equity funds, we offer the following categories: Global Large-Cap Value Equity, Global Large-Cap Blend Equity, Global Large-Cap Growth Equity, and Global Small/Mid-Cap Equity. The higher degree of precision avoids giving too much credit to managers who may be poor stock-pickers, but who have simply benefited from emphasising a hot area of the market, and conversely, helps highlight those who are truly adding value.

The vagueness of the trade association’s sector can lead to problems with making meaningful comparisons, particularly in an environment such as that of the past five years, when a particular style leads the way for an extended period. With that in mind, we’ll start our multi-part review of the Global Growth sector today by identifying the key performance drivers in the group over the past three years. We’ll the follow up with two columns addressing specific funds in the group that we think are noteworthy.

Smaller is Better
As in the UK, large-caps have lagged smaller-cap issues badly on a global basis, and the better performers in the sector are funds that have either capitalised on this trend or have been fortunate enough to have mid- or small-cap mandates. One way of seeing this is by looking at Morningstar Categories: The Global Large-Cap Value Equity category, the best performer of our three global style-based large-cap categories, returned 15.7% annualised over the three years ended June 30. In contrast, the Global Small/Mid-Cap Equity category returned 18.1 % annualised over the same period.

Within the IMA’s Global Growth sector, funds with top-quartile three-year returns have median exposures of 29.5% to giant-cap stocks and 28.3% to mid-caps, whilst the bottom-quartile performers have median exposures of 49.7% to giant-caps and just 14.6% to mid-caps. The funds with the largest mid-cap exposures include M&G Global Basics, Henderson Global Care Growth, Henderson Industries of the Future, Invesco Perpetual Global Smaller Companies, and Jupiter Ecology.

US Exposure Hurts Funds
Market cap is far from the only variable influencing fund performance in this sector. Exposure to the comparatively sluggish US market is a key swing factor: Funds with top-quartile three-year returns devoted a median of just 18% to the US. Bottom-quartile performers, on the others hand, kept a median of 44% in the States. Funds with the highest current exposure to the US include UBS Global Optimal, Invesco Perpetual Global Dynamic Theme, Lazard International Equity, New Star Global Equity, and Credit Suisse Worldwide Growth.

Industrials Soar, Tech and Drugmakers Struggle
Among economic sectors, technology has dented the returns of some of the worst performers over the past three years, as has health-care. The bottom quartile of funds over that period has more exposure to technology hardware and software and to telecommunications than the best quartile. The bottom quartile also had a median healthcare weight that doubled that of the top-quartile, as drugmakers continued to struggle. Funds with a high degree of exposure to the surging industrial materials sector fared well, as they benefited from the growth in demand for raw materials driven by emerging markets. The most notable example of this is Graham French’s M&G Global Basics, which had 50% in the sector as of 31 May. Not coincidentally, it is also the sector’s best performer over the past three years. But is it good, or just lucky? More on that next week.

A version of this article previously appeared in Investment Adviser, Financial Times Ltd.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.

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