Regional risks
Japan has been an interesting region in which to invest for global funds.
The country is continuing to feel its way through the Abenomics programme of reforms, designed to increase inflation from its current moribund levels. Its central bank continues to buy up a range of assets in an effort to support this goal, driving its currency down but sending share prices up.
As a result, foreign exchange factors can significantly affect overall performance. Over the past year, the country’s Topix index is up 32 per cent, but this translates into a 20 per cent return for UK investors as a result of the yen’s weakness. But it is another region that may have the largest bearing on global funds’ fortunes in future.
The US market has been labelled the most overvalued of all major regions for some time now, and this may be another reason for investors to look to a more global approach. But care should be taken with global portfolios: after all, the MSCI World has a 60 per cent weighting to the US. A significant proportion of active global funds tend to stick relatively close to this weighting, meaning they too are reliant on American shares for a sizeable portion of their returns. That may prove riskier than usual in the future.
In this context, it may be a sign of things to come that the fund with one of the best returns in 2016/17 is Dodge & Cox Global Stock. It saw 42.7 per cent growth – almost 10 percentage points above the sector average – despite coming 20th in the table for its performance over five years.
Dodge & Cox is a well-known name in the US, but its global portfolio does not particularly favour its home market. The fund had 47 per cent in the US as at the end of March – well below the 60 per cent index weighting. Instead, it has been overweight regions such as emerging markets and Europe.
An equally important factor in the fund’s performance over the past 12 months is likely to be its significant overweight to financials – a sector that has benefitted, until recently at least, from improving expectations for growth and rising interest rates.
By contrast, much of the fund’s prior lag in performance – in comparison to the featured funds that made it into the top 10 – appears to be the result of returns produced over the previous two years. In 2014/15 it came in just below the sector average, while in 2015/16 the fund shed 5.3 per cent.
With levels of market volatility still at record lows, and equities seemingly able to shrug off all manner of external hazards, the outlook for global funds in the short-term is mostly positive.
