Global Equities

Harnessing The World

Recent years have seen widespread demand for global equities. For many, a domestic investment approach is too restrictive and inconsistent with a world in which trade barriers have fallen and cross-border mergers are the norm. For others, the trend to global investing reflects a broader “back to basics” theme. Greater consideration is again being given to risk, with simplicity and transparency of process the watchwords for this new era of investing.

The Rationale For Going Truly Global

The trend towards global investing is soundlybased taking in an ever-wider universe of opportunities as more nations emerge from the economic shadows to assume a greater role in the advance of global growth. Who
can now ignore China? Latin America is an important region for harvesting natural resources like oil, copper and gold. Russia and the other countries of the old Soviet bloc are more open to capital investment. Emerging markets can no longer be sidelined as a niche investment.

Why The Move To ACWI Benchmarks?

Investors are increasingly taking advantage of emerging markets by moving their benchmarks away from MSCI Developed and to MSCI All Country indices.

Emerging Markets have expanded from less than 1% of the global equity opportunity set in 1988 to more than 12% in 2009 (MSCI All Country World Index). This reflects their growing economic importance during this
period.

So why are global equity investors including emerging markets in their portfolios:

• Emerging Markets now represent more than 27% of the world’s GDP (based on the MSCI All Country World GDP Index)

 

• Investing in emerging markets offers the widest possible universe of investment opportunities and investors enjoy the flexibility and benefits of moving in and out of different regions.

 

• Inefficient markets mean there are invariably more pricing and valuation anomalies to be exploited.

 

• Correlations between markets are now so high that the benefit of country or regional diversification is often illusory.

 

• Trends in one area of the world are invariably followed at a later date elsewhere. Global investors can benefit from “second mover advantage.”

 
Tackling The Global Challenge

However, some of the factors that make global investing so attractive – the breadth of opportunity, for example – also complicate the investment process. Global investing therefore favours investment houses with a depth and breadth of research capability around the world. Narrowing the global universe to a manageable short-list is a time-consuming process.

One solution may be a two-step process which first identifies the most attractive stocks in each industry sector and then creates a “best of the best” portfolio of high conviction ideas. Such a portfolio should show the potential for higher alpha generation through its latitude to diverge from the benchmark.

Those seeking a more conservative approach, may be attracted to a process which draws upon the same fundamental inputs but then overlays quantitative risk-control tools to deliver a portfolio showing benchmark-like characteristics.

Either way, the implication is clear. A global equity mandate is best-placed with an asset management house with a demonstrable research and stock selection advantage.

 

Source: Citigrouwp, 2009
Although asset allocation has been demonstrated to be an important determinant of portfolio returns, once the decision has been made to allocate to an asset class such as global equities, stock selection is more important. The chart above shows the proportion of returns that come from the various factors which influence the price of stocks in the MSCI World Index. Over the past 20 years, 75-80% of total portfolio return has been consistently shown to come from picking the right names. The contributions from picking the right sector or right country are much lower.

Fidelity Global Opportunities

The Global Opportunities process is the ultimate expression of Fidelity’s sector-driven stock picking expertise. Clients access our Global Equity Team’s very best ideas in a fund where the construction process is transparent, straightforward, robust, risk-controlled and repeatable. Specialist sector portfolio managers identify their best ideas and then portfolio manager Ilario di Bon weights these to reflect conviction in each sector’s attractions at that point in the cycle.

The Global Opportunities discipline results in a concentrated portfolio of 80-120 stocks. The portfolio targets a tracking error of 3-6% and alpha before fees of 3% pa, over a rolling three-year basis.

Fidelity Select Global Equity

Select Global Equity is an active, bottom up, style neutral discipline, combining Fidelity’s fundamental stock research with systematic tools to control portfolio risk. Qualitative stock selection from Fidelity’s research analysts provides value above the benchmark and quantitative tools control the variability
of returns.

The fully-diversified portfolio of 400-600 stocks aims to outperform its benchmark by 1.5-2.5% pa, over a rolling three-year period, with an expected tracking error of 1-3%. This should result in an information ratio of around one.