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The end of geography

The biggest trend in investment management over the next decade is obvious. It is a simple consequence of globalisation and will result in at least a quarter of all UK-authorised funds changing their investment policies, often quite radically. It is the end of geography.

Already investment managers use a thematic or sectoral approach with most large-cap investing. What is the point of comparing BP with Shell? You have to compare them with Exxon, Total and other large integrated oil companies, regardless of location. Likewise with big pharmaceuticals, big media and big telecoms.

It does not just apply to large cap. There are many small-cap UK stocks that are market leaders in their own global sectors (many in software or services) whose fortunes owe little or nothing to what is happening in the UK economy. The UK is a more open economy than most so we are ahead of the curve but the trend is global because it is facilitated by Web 2.0 and all it implies.

I expect thematic or sectoral investment to become the norm over the next decade. Funds investing in North America, Europe or the Far East will still exist but their numbers will dwindle. Global equity income funds are only the first of a new wave of funds that will apply many different strategies on a global or regional basis. The trick will be finding themes that are real and not just gimmicks.

Apart from globalisation, another reason for the trend is the ability of funds using Ucits III powers to entirely separate the currency return from the market return through overlay strategies.

You do not have to cumbersomely hedge in old-fashioned ways. You run the investment portfolio and you run a currency strategy. This too is on the way to becoming the new normal.

A few managers and advisers have bought thematic investment wholesale. This seems to me to be chucking out the baby. We could start with abandoning the idea that it makes any sense to have a UK large-cap fund. Most of the shares it owns will be in businesses competing with other businesses located in a dozen different countries and at any time many of these will be more attractive investments on either fundamental or technical grounds.

In the case of the FTSE, with 70 per cent of its earnings derived from overseas, the redundancy of a UK-only large-cap approach is obvious. A large-cap global equity fund is surely the right substitute, with a sterling-biased overlay for UK residents.

Thematic enthusiasts claim diversification benefits but I am sceptical. In a crisis, thematic funds will almost certainly tank along with everything else.

But even though sectors such as agriculture, timber and infrastructure are, in the end, only specialised equity funds, they make sense as a way of allocating part of investment portfolios.

The biggest growth may be in themes applied through passive funds, where quantitative techniques now allow managers to apply almost any strategy.

Exchange traded funds delivering equity income, momentum, alternative energy and so forth will, at least in theory, provide better liquidity than many conventional open-ended funds.

Advisers will use more of them in core and satellite portfolio structures, in which the core contains lower-risk long-term strategies like equity income and absolute return. And the satellites can contain anything from gold, biotech and agriculture to nuclear energy and wind power.

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report


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There is one comment at the moment, we would love to hear your opinion too.

  1. It’s all very well to say this but where will it end, history, dvinity……its hardley an dargument

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