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The weight of the world

Globalisation has blurred geographic borders, yet many investors still view investing on this basis. It does not help that most factsheets highlight country weightings, even though these days, funds are rarely managed geographically and that for the most part, the weightings are inaccurate.

It is not that groups are inaccurate in their reporting of geographic weightings, rather that individual country allocations say very little these days. Just look at the UK, which many managers point out has a high percentage of companies that have very little to do with the domestic economy. However, while there is consensus that look-through portfolio data is more useful, many are stymied to come up with a solution.

Without one, it means advisers have a tough job not only working out client allocation overlaps but also an assessing the differences between the offerings.

The Association of Investment Companies reported last week that portfolios in its global growth sector have increased weightings to regions such as the Asia, US and Europe while decreasing allocations to the UK and Japan. According to the AIC’s research, global growth trusts’ exposure to Japan has fallen from 8 per cent at April 30, 2006 to four per cent by April 30 this year while exposure to other Pacific regions has risen from eight to 12 per cent.

“Holdings in China particularly increased for Edinburgh Worldwide (from 1 per cent five years ago to 16 at 30 April 2011) and Scottish Mortgage (5 per cent five years ago to 14), while Establishment Investment Trust increased exposure to Hong Kong from 5 per cent five years ago to 14 per cent. Miton Worldwide Growth increased exposure to the Far East and Pacific region from 10 per cent to 18 while Jupiter Primadona increased its exposure to the Far East and Pacific Region from zero five years ago to 6 per cent.”

The UK has shown one of the biggest marked declines, the Aic report shows. On average, global growth portfolio exposure to the domestic market was 42 per cent five years ago as opposed to 32 per cent today.

Yet all these numbers may be masking the move by managers to compensate for the changing dynamics of the world economy. With a greater focus on the engines of growth, such as China, perhaps a lower UK exposure is a natural byproduct. Maybe the reduction in UK weightings has more to do with managers looking to avoid overexposure to emerging markets by also holding UK stocks that feature large percentages of their business in these regions.

James Thomson, manager of the Rathbone global opportunities fund, says he has been increasing his UK weighting of late, to 20 per cent, while his US exposure is the highest it has been in years at 30 per cent. However, he points out that information says very little about his views on those markets as he does not manage his fund on a geographical basis. Instead, he looks to move to either an aggressive or defensive stance and select sectors and stocks that suit his outlook.

Thomson said the geographic markets are so indistinct these days that country weightings have become more illustrative than instructive. For instance, the Rathbones fund has no direct holdings in emerging markets but Thomson places his allocation to the region at close to 20 per cent.

Sectors have become more important than regions for many global managers but many are roughly geographically-bound. For instance, technology stocks are mostly found in the US while the UK dominates among mining or oil and gas firms and Germany is a big provider of industrials.

The move by global funds away from geographic benchmark allocations is reminiscent of a similar move by European funds, which shifted away from allocating by country years ago. However, more latterly, with the issues in the peripheral countries, some have moved back to this style of investing. Is the same trend likely to happen in the global sectors?

Thomson believes if there was a region-specific disaster then yes, geography comes back into play. However, the question still remains – how would investors even know the difference? Many are reliant on prospectuses and factsheet data to ascertain how managers run their portfolios and a big part of the information given to them is country weightings.

Thomson says: “The IMA global sector is a quirky group of funds as there is huge variety of mandates – small cap, dedicated resources or healthcare funds to income. There are also significant style and philosophical differences between the ways they are managed so some will be superstars at different times. All of which means investors really have to do their homework to know what they are buying.”

James Budden, director of marketing and distribution at Baillie Gifford, agrees that geographic weightings for global funds can be irrelevant and in some cases, misleading. “Some investors may see a geographical breakdown in a fund and view a large allocation as an indication the manager is bullish on a certain region, when in reality that is just where the company is listed.”

With the onus on advisers to communicate that what they see is not necessarily what it means, Budden is sympathetic. However, he does not see any viable solutions to the issue. Fund managers may know their look-through weights to regions but they would need to prove it on a monthly basis on all their portfolio holdings in order for it to be included in communications like factsheets.

The AIC has also flagged lookthrough allocation information as a growing issue. However, the trade body is aware that provision of that type of information is fraught with complications and has no realistic solution in the short to medium term.

It notes that underlying information provided by investee companies would vary in terms of structure and methodology and some might not even provide the level of information needed, which could lead to a partial, and potentially misleading, picture.

The AIC believes any work in this area would need to be a collaborative approach across all institutional investor groups and with the support of investee companies.

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