I wrote last year about how our investment process enables us to focus on stock selection. For the vast majority of global funds, regional allocation accounts for the bulk of performance divergence from the benchmark. Given the significance of this driver of performance most global fund managers should be spending most of their time assessing the relative merits of differing regional allocations.
The trouble is that this reduces fund management to a few decisions in an area where I would be sceptical of anyone’s claim to consistently make the right decisions. For this reason, and others expanded upon in my earlier article, we run the FP WHEB Sustainability Fund with regional geographic exposure kept quite close to the MSCI World regional geographic exposure. This means we can justifiably focus all of our time on stock selection and know that the fund performance will be driven by that rather than a couple of regional allocation decisions.
The last twelve months have been an interesting case in point. In this period, the S&P 500 Index has risen by over 16% in sterling terms. The FTSE 100 is flat, most other European markets declined, and the Nikkei and the Hang Seng are up 5% and 9% respectively in sterling terms. The MSCI World Index in GBP has risen by 10%.
Most UK based global funds have lagged this return by a considerable margin. According to Trustnet, the median fund in the IMA Global sector has risen by 5.7% in the last 12 months, underperforming the MSCI World by over 4%.
Much, if not all, of this underperformance will be due to asset allocation. Most UK based global funds are overweight the UK and Europe, by virtue of their location, and tend to be underweight North America. This has not been a good allocation decision in the last 12 months and good stock selection decisions are unlikely to have been able to compensate. Partly as a result, we are pleased to see that our fund is in the top quartile of the IMA Global peer group over 12 months. Our focus on stock selection is benefitting us relative to our peers.
We will continue to keep our regional allocation close to the MSCI World allocation. Our attention is focussed on stock selection and we expect to continue to be able to add value through picking the best stocks to invest in from our sustainability themes.
 Source: Bloomberg 13th
 Source: Trustnet 13th
 Source: Investment Week 10th
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