Global equity funds are very popular with investors, according to the latest monthly figures from the Investment Association. They showed the IA Global sector was the second bestselling sector in May, attracting net retail sales of £347m. The best performing fund in the sector has returned 92% over the last three years, according to FE data.

But why would you want a global equity fund, what role do they play in portfolios, and how can you choose the right one for you?

Global equity funds can be a useful one-stop shop for DIY investors who lack the time and skills to pick stocks for appropriate global markets. When you buy a global equity fund, you are letting the manager of that fund do the regional asset allocation for you.

The challenge is to know which global fund is best for you as inexperienced investors often find them hard to tell apart.

FOUR BUCKETS FOR YOUR FUNDS

When choosing any global fund, a good starting point is to think about what you want it to achieve in your portfolio.

AJ Bell fund manager Simon Molica says he would assess global equity funds by putting them into four different ‘buckets’ according to whether they aim to generate income, whether they should be a satellite or core holding, and whether they buy quality businesses.

A core holding might be well diversified with no particular style tilt and perform in line with the benchmark, while a satellite fund might be the opposite, with high active share (meaning it is positioned quite differently from its benchmark) and requiring more patience from investors because of fluctuating returns.

The quality bucket might include funds like Fundsmith Equity (B41YBW7), Investec Global Franchise (B7VHRM9) or Morgan Stanley Global Brands (B45K057). These funds follow a Warren Buffett-style philosophy of companies with a ‘moat’, or high barriers to entry.

‘You need to understand what you are actually buying, the circumstances in which it can outperform and underperform so you know what to expect in different market conditions and you don’t end up disheartened,’ Molica says.

He suggests it’s also important to understand how a global fund manager screens stocks. With such a huge investment universe to choose from, funds either need a methodical approach in place to pick future winners or a large team of researchers to sift through ideas.

‘If a group doesn’t believe in fundamental screening it is harder because they have the whole global universe of stocks to research. You need discipline to bring the universe down to a manageable size or else you need a big team in place to help you do that.’

When choosing a fund, PSigma IM’s chief investment officer Tom Becket advises investors to seek as much information as they can from independent data providers and read commentary and factsheets on providers’ websites.

‘Investors should always bear in mind that the asset class is large so you need to do your homework. Make sure you understand how that fund will blend with the rest of your portfolio or you could find yourself putting too many eggs in one basket.’

SIX GLOBAL EQUITY FUND PICKS

Simon Molica highlights two global equity fund picks in the open-ended universe. Fidelity Global Special Situations (B8HT715), managed by Jeremy Podger, is one he suggests could work well as a core holding.

Podger has a long track record, and the fund is well diversified and style neutral with a tilt towards large-cap stocks. Focusing on misunderstood or undervalued growth prospects, the fund aims to deliver in a range of market conditions, and it is backed by Fidelity’s large team of analysts.

The second is James Harries’ Troy Global Income Fund (BD82KP33) which aims to protect investors’ capital. Molica comments: ‘I like the philosophy of the company; it is very focused on capital preservation, high and sustainable return on capital, long term dividend growth. I would expect if we had a big drawdown in the market that it could protect your capital.’

In the closed-ended space, he points to Scottish Mortgage Investment Trust (SMT), managed by Baillie Gifford’s James Anderson.

Molica suggests this could be held as more of a satellite holding because of its high active share. ‘At the heart of Baillie Gifford’s investment process is to search for stocks which display strong growth characteristics. This trust will at times deviate heavily from the returns of the benchmark given its long-term and high active share mentality. Investors should be aware that it is typically very growth-oriented by investment style.’

PSigma IM holds Artemis Global Income Fund (B5N9956) for its attractive yield and value bias, as well as River & Mercantile Global Recovery (B9428D3) which Becket says ‘allows us to get exposure to cheaper parts of the world that are harder to access’ such as deep cyclical sectors in Europe including industrials, energy, and some banks.

He also likes thematic fund Polar Capital Healthcare Blue Chip (BPRBXV2) which he calls ‘a good long-term growth opportunity’. (HS)

DISCLAIMER: Editor Daniel Coatsworth has a personal investment in Fundsmith Equity referenced in this article.

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