Global equity funds have been popular over the past decade, with returns driven by companies with the potential to deliver high levels of earnings growth in the future and investors happy to pay a premium price to own these stocks.

The market rotation away from high growth stocks this year has now left a lot of investors wondering what to do as many popular global equity funds have struggled of late.

These funds have been dragged down by fast growth stocks now trading on lower earnings multiples and the market saying future cash flows are worth less today when you factor in rising interest rates.

ADJUSTING PORTFOLIOS

Global equity funds are still relevant, and it makes sense for investors with at least a five or 10-year horizon to have exposure to companies around the world to obtain geographic and sector diversification.

Investors simply need to consider what’s inside these funds’ portfolios and take a view whether holdings are attractive or not in this new environment where central banks are withdrawing liquidity and interest rates are generally going up around the word.

This shift in the market will mean some investors will need to adjust their own portfolios. One solution is to increase exposure to the value investment style, namely companies which trade on cheaper valuations and generate profits today, albeit growth is expected to be solid rather than spectacular.

TICKS THE RIGHT BOXES

Artemis SmartGARP Global Equity Fund (B2PLJP9) ticks all the right boxes. The global equity fund taps into the value end of the market, looking for quality companies at a reasonable price. The fund has so far this year outperformed its benchmark during a rocky time for stocks and shares.

It has protected investors’ money with a mere 0.8% dip in the year to 4 February 2022 versus a 4.6% decline for the MSCI All Countries World Index, a 6.7% slump for investor favourite Fundsmith Equity Fund (B41YBW7) and a 14% dive for another popular global growth fund, Blue Whale Growth (BD6PG78), according to FE Fundinfo data.

Artemis SmartGARP Global Equity manager Peter Saacke puts the fund’s resilient performance down to an investment process which analyses factors such as earnings growth, valuation, revisions to earnings estimates and ESG.

The process means the fund hasn’t chased the highly rated stocks which were caught up in market hype in recent years, and so it hasn’t suffered from the big sell-off in these types of shares this year.

LOOKING FOR TOP SCORERS

The SmartGARP process scores companies between zero (worst) and 100 (best). Saacke focuses on the top 10%, namely those scoring above 90. Top holdings include pharmaceutical group Pfizer, US semiconductor firm Qualcomm and banking group JPMorgan Chase.

The fund also has stakes in Microsoft, Alphabet and Apple – while these score in the mid-80s on the SmartGARP process, this is a classic case of a fund manager preferring to own key stocks that drive the market otherwise they run the risk of underperforming versus the benchmark without them.

Saacke says he is being pragmatic by including these three names as they do score well on relative terms. ‘It makes sense to own these mega caps but wouldn’t include any others that scored nowhere near the 90-level threshold, such as Tesla,’ he adds.

TOP QUARTILE

On a five-year basis the Artemis fund has underperformed the market and the two popular global funds mentioned earlier in this article, Fundsmith Equity and Blue Whale. That’s understandable given that its investment process shifted towards value names for much of this period, and this investment style has been out of favour. Its low exposure to technology stocks has also worked against the fund relative to the market.

With the market now rotating towards value, Shares believes the Artemis fund looks more attractive. In fact, it has scored in the top 25% of all global equity funds for performance over the past three, six and 12 months.

There is no guarantee it can keep up this performance, but Saacke believes the shift in the market mood caused by a different economic environment will favour value stocks for some time. ‘I think we’ll see a broad value outperformance with a few very sharp rallies of the prior winners, in a similar way to the TMT (technology, media and telecoms) boom and crash in 1999/2000,’ he says.

GROWTH COULD BECOME CHEAPER

Saacke’s quest for growth at a reasonable price has meant that since 2018 he’s been fishing in value-style stocks which have been out of favour, such as the more pedestrian sectors like banks.

Following the market shake-up which can be traced back to November 2020, if faster growth companies see further contraction in the multiple of earnings at which their shares trade, then these stocks could eventually appear on ‘growth at a reasonable price’ screen. That’s why Saacke believes his fund will be more balanced between value and growth-style investments in five years’ time.

For now, Artemis SmartGARP is one of the cheapest global equity funds on a price to earnings basis. At the end of 2021, its portfolio traded on an average PE of 8.1 versus 17.6 from the benchmark MSCI All Country World index.

For this bargain valuation, investors get exposure to various Canadian banks which perhaps sum up what to expect from the fund. Saacke calls them ‘boring’ but adds that they trade at a discount to the market, pay good dividends and are ‘churning out solid growth’.

He adds: ‘I’m not talking super stellar technology growth, but solid growth which is now seen as more attractive to have.’ Often boring is beautiful when it comes to investing and patience with this fund could be rewarded handsomely. [DC]

DISCLAIMER: The author has a personal investment in Fundsmith Equity

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