Holding international stocks is one of the best ways to build a more balanced portfolio. Cris Sholto Heaton picks five global funds with distinctive strategies.
Two weeks ago I looked at five funds that focus on higher-quality emerging-market companies and that should be good long-term picks for investors who want to remain invested in emerging markets throughout the inevitable ups and downs. My choices consisted of two investment trusts Scottish Oriental Smaller Companies (LSE: SST) and Aberdeen Asian Smaller Companies (LSE: AAS) and three open-end funds Waverton Southeast Asian, Somerset Emerging Markets Dividend Growth and Findlay Park Latin American.
In my own portfolio I combine emerging-market investments which will be volatile regardless of how good the underlying companies are with more stable developed markets. If all goes well, I expect the emerging-market holdings to perform better than developed-market ones on average over the long term but constructing my portfolio this way means that I'm not staking everything on this outcome.
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Meanwhile, by focusing on the right kind of stocks, I should be able to reduce the risks without sacrificing too much of my returns. This means picking the best options from around the world and avoiding the mediocre stocks that clog up the portfolios of most global funds. As with my emerging-market investments, I typically invest directly into individual companies rather than funds. However, there are a handful of funds that follow a similar approach to mine, so these would be the kind of holdings that I'd pick to complement the emerging-market funds.
Investors consistently fail to grasp the way that the best global multinational companies in the most attractive sectors can grow over the long term. There are only a small number of these companies in the world well under 100 and while they are certainly not cheap today, neither is the wider market. I would rather pay a full price for a top-quality business than a slightly lower (but still dear) price for an inferior one.
The fund that most obviously follows this strategy is Fundsmith Equity. You may notice that Fundsmith's much-hyped Emerging Equities Trust did not make it into my emerging-markets list. The managers, whose backgrounds are largely in developed-market stocks, are clearly still finding their feet in emerging markets and have made a number of surprising decisions while doing so.
The trust trades on a small premium to net asset value, while more-proven funds trade on a discount, so there is no reason to invest until they build up a better record. But Fundsmith Equity is a more compelling prospect, although it's worth being aware that its noticeable US bias is partly responsible for its strong performance since inception.
Lindsell Train's range of funds, which include Finsbury Growth & Income Trust and Lindsell Train Investment Trust, also follow a similar approach, although they are willing to invest in slightly smaller firms and are far less heavily invested in the US. So one of these funds would complement Fundsmith well. I'd go for the open-end Lindsell Train Global Equity, since Finsbury is too UK-focused and the Lindsell Train Investment Trust has more than 35% of assets in Lindsell Train's fund-management company, which is perfectly legitimate but doesn't suit my objectives.
It's not clear whether large tech companies are worth their current high valuations, but their hugely scalable, capital-light businesses mean they may be. So I think it's worth having part of the portfolio in this sector. The obvious choice is Scottish Mortgage (LSE: SMT), a high-conviction, growth-focused investment trust with a huge tech bias, managed by Baillie Gifford. I flat-out disagree with some of the choices in the portfolio, but the winners could comfortably outweigh the losers.
I've tried to avoid having more than one fund from the same house, but there's no avoiding it here. Japanese smaller companies are an extremely interesting market, but are underresearched and underrepresented in most global funds, so I favour a dedicated fund. Baillie Gifford Shin Nippon (LSE: BGS) is an obvious pick (disclosure: our editor-in-chief, Merryn Somerset Webb, sits on its board).
Finally, I'd look for a well-diversified global fund that specialises in the kind of smaller, niche stocks that are often overlooked and can earn very good returns. There aren't many funds in this area that fit, but the relatively little-known McInroy & Wood Smaller Companies looks an interesting choice.
Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.
Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.
He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.
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