When you start investing, choosing your first investment can seem a daunting task. You may be unsure whether you want to invest directly in companies through buying their shares or indirectly via funds.
One major advantage of investing via funds is that you can get instant diversification from a single investment. And with global equity funds, you won’t just get exposure across different industries, but across various geographies too.
By not restricting yourself to a single sector or country, there’s a greater pool of opportunities to benefit from. And on top of this, diversification across multiple sectors and countries can usually be expected to reduce risk in your portfolio, potentially improving your overall risk-return ratio.
Fundsmith Equity
When investing in funds, most retail investors tend to go for an open-ended investment company (OEIC). And for this type of fund, one of the most popular options in the global equity category is the Fundsmith Equity Fund.
Managed by Terry Smith since 2010, it’s a highly rated fund that has been awarded a five-star performance rating from investment research firm Morningstar. Over the past five years, it has delivered total returns of 144%, allowing it to easily outpace the average performance in the IA Global fund category of just 68%.
Fundsmith Equity has been able to achieve its outsized returns by keeping its investment portfolio concentrated, with typically less than 30 stocks at any one time. Smith prefers to pick quality businesses that are resilient to change, particularly those with competitive advantages that are difficult to replicate.
As of the end of February, it had 28 holdings, with significant sector concentrations in technology (34.6%) and healthcare (25.5%). Its biggest positions include Paypal, Microsoft, Amadeus, Novo Nordisk and Stryker.
The fund has an ongoing charges figure (OCF) of 0.95% for its I class shares.
Smart-beta
For those seeking a fund which is cheaper to invest in, smart-beta ETFs may offer many of the benefits of active management but at substantially lower costs.
Unlike most ETFs, which passively track popular stock market indexes, smart-beta ETFs follow tailor-made indexes which attempt to beat the market. Stock weights in such funds are based on factors, such as momentum and value, which have historically led to outperformance over broad stock market indexes.
The iShares Edge MSCI World Momentum Factor ETF (LSE: IWFM) is one such fund which invests in MSCI World stocks that have been experiencing an upward price trend. With an OCF of 0.3%, investing in this momentum strategy comes at small added expense in comparison to the standard iShares ETF that tracks the MSCI World Index, which has an OCF of 0.2%.
But on the upside, the smart-beta ETF has delivered a superior past performance. Since inception in October 2014, the fund has delivered a total return of 57% in dollar terms, allowing it to easily outpace the MSCI World Index, which would have only returned 31% over the same period.
Looking ahead, further outperformance may still be yet to come. Researchers have found that the momentum effect in stock markets has existed in time periods going back more than a century, so it’s possible that winning stocks will continue to win. But as the old adage goes, past returns are not a guarantee for future performance.
