Global funds: Elite-Rated picks for every investor

Key takeaways:

• Global investment funds hold the shares of companies listed on international stock markets
• Portfolios are usually very diversified in terms of sectors and countries
• You can choose between global index funds and active global funds
• Global index funds are the cheapest but won’t outperform stock market benchmarks

What are global funds?

They are pooled investments that buy the equities of companies listed on international stock markets. Depending on the fund’s remit, these can sometimes include emerging markets. Capital growth is generated from rising share prices of these stocks, while income-focused funds will also make returns from dividends paid out of profits.

Why invest in global funds?

The main benefit is diversification. The London Stock Exchange only represents a tiny fraction of international stock markets, so global investment funds provide exposure to broader opportunities. This includes underrepresented sectors in the UK market, such as technology, as well as emerging economies at earlier stages in their development.

Types of global funds

No two global investment funds are exactly the same. They can differ in their objectives, processes, stock selection and geographic exposure.

Active vs passive global funds

Let’s start with how they are managed. The two main types of global investment funds are active and passive. Active global funds are run by managers who can choose which stocks to hold in their bid to outperform the market. Passive funds, meanwhile, track a particular index by replicating the holdings. The returns of these global index funds will be similar to those of the markets they track.

Investment styles within global funds

Funds can also embrace different investment styles. For example, growth-oriented managers buy companies whose earnings can grow faster than the market expects. These names can include fast-developing technology companies that aren’t being closely followed by stock market analysts and can surprise on the upside. Then there are income-focused managers who favour companies with a history of paying stable and growing dividends to their shareholders. In addition, there are value managers who search for undervalued stocks and those who blend various styles into one overall portfolio.

Developed vs emerging markets exposure

Some global investment funds restrict themselves to developed markets, such as the US, Europe and Japan, while others embrace emerging areas such as China and India. It’s important to know the difference. Emerging areas offer the potential for better-than-expected returns but are also more volatile.

Benefits of global funds (and when they’re most useful)

So, what are the main benefits of global investment funds?

• Instant diversification
• Exposure to fast-growing sectors
• Less single-country risk
• Possibility of income
• Suitable for most investor types

The biggest risks

Let’s now look at the main risks of global investment funds.

Currency risk

Investors may find that constant currency fluctuations will affect their returns. This is more of a concern when investing in a fund with exposure to multiple countries. Some investors hedge returns, which ensures that returns reflect only the performance of the stocks and not exchange rates. However, hedged share classes can cost a premium.

US concentration risk

Many supposedly global investment funds can actually be heavily weighted towards the US because it’s such a large market and home to many global powerhouses. That’s why it’s important to establish whether a fund is truly diversified by looking at the country and sector breakdown in its latest factsheet.

Market and emerging market risk

All funds can lose money, but those with a heavy weighting towards emerging markets can be more volatile as companies are often at earlier stages in their lives. Remember to only invest what you can realistically afford to lose – and acknowledge that past performance is no guarantee of future returns.

How to choose a global fund

Here are the steps to finding the best global investment funds.

Define your objective

Do you want growth or income? Are you looking to invest over a long investment horizon or needing to generate an extra monthly revenue stream?

Consider your risk appetite

How do you feel about volatility? Are you comfortable with your portfolio’s value fluctuating in the hopes of achieving higher returns, or do you prefer a more stable performer?

Check the geographic and sector breakdown

A global name tag doesn’t guarantee it’s diversified. The fund’s monthly factsheet will reveal its exposure to different sectors and countries. You need to ensure its construction reflects your needs.

Review costs and charges

Costs can vary between funds. Pay particular attention to the Ongoing Charge Figure (OCF). This is a percentage representing a fund’s annual operating costs.

Manager approach and independent research

Past performance is no guarantee of future returns, but a fund manager’s track record reveals how they’ve performed during different market cycles. Establish what they’re trying to achieve, their overall investment philosophy, their tenure at the fund, and how they have performed over various periods.

Where do global funds fit in a portfolio?

Global investment funds can play different roles. Their diversified nature makes them suitable for beginner investors wanting a broad spread of international assets. However, they can also be used by more experienced investors who opt to have them at the core of a portfolio and then add more specialist satellite holdings. Global equity investing is typically best suited to those with investment time horizons of at least five years, so as to ride out market volatility.

Our process & how we select our Elite Rated funds

FundCalibre’s analysts subject global investment funds to close scrutiny and only award the very best a prestigious Elite Rating. The process starts with AlphaQuest, our proprietary quantitative screening tool that estimates the likelihood that a fund manager will deliver superior returns. Funds passing this test will be quizzed on their investment philosophy and approach to portfolio construction. This analysis will be subject to peer review before a decision is made.

FAQs about global funds