Key points:
I like telling people, “build portfolios, don’t pick funds”. And at that point of the conversation, their eyes start glazing over, or in some cases, roll to the back of their heads.
I can understand the lack of enthusiasm. Very often, portfolio construction is portrayed as advanced rocket science that should not be attempted by mere mortals. To be fair, as an industry professional, a certain degree of sophistication is expected to properly structure a portfolio of between 30 to 100 securities. But at an individual investor, such sophistication is excessive; like starting a lettuce plantation to make a salad.
The reality is portfolio construction is probably easier than Singapore’s primary 5 math questions.
Three general activities make up portfolio construction:
- Select at least two weakly-correlated assets: the simple default answer is equity and bonds. Not much effort required here.
- Select a globally-diversified fund for each asset: here’s where a good portion of individual investors’ effort goes. Sieving through the 500+ funds offered on our platform, and selecting a global equity fund and a global bond fund.
- Rebalance yearly: Pretty straightforward…the first time might be a little daunting, but it gets much easier as you go along.
So that’s where most of the work goes: 50% of the effort goes into choosing a good bond fund for your portfolio, and the other 50% goes into picking a good equity fund for your portfolio.
As far as Global Bonds go, there are quite a number of good-performing global bond funds available, including our recommended global bond funds: DWS Lion Bond Cl A and FTIF-Templeton Glb Bond A(mdis) SGD-H1, much of which has been written on both funds here, and here.
And here’s where the there’s a bit of a bald spot in our coverage – we have yet to take a look at the options available for Global equities. So let's see if we can reduce the hassle of portfolio construction by 50% by picking out the strong performers in our stable of global equity funds.
Global Equity Funds
Turning once again to the trusty fund selector, we can pull out a list of all global equity funds with the following parameters:
Main Category: Equity
Specialist Sector: General
Geographical Sector: Global
This will return a long list of 28 funds. For the sake of readability and conciseness, I’ve only included funds with a 5-year track record, and where there is more than one currency class, I’ve opted for the SGD share class. This leaves me with 15 funds, displayed in Table 1.1. Our benchmark is the MSCI World Index, which is our proxy for global equity markets.
| Table 1.1: Calendar year return, end-2006 to end-2011 |
| Aberdeen Global Opportunities |
7.90% |
-39.63% |
32.44% |
-0.04% |
-1.27% |
| First State Global Opportunities Fund |
7.66% |
-41.78% |
24.03% |
-2.73% |
-3.45% |
| MSCI World Index |
5.40% |
-41.90% |
32.49% |
3.50% |
-5.93% |
| HGIF Glb Eq Fund-A SGD |
4.50% |
-43.01% |
22.91% |
-1.10% |
-6.05% |
| Henderson Hzn Glb Opp Fd A2 USD |
9.07% |
-43.75% |
32.26% |
3.02% |
-8.16% |
| Fidelity Intl A-SGD |
6.21% |
-44.38% |
30.63% |
1.92% |
-8.41% |
| RIC World Equity II ClJ USD |
4.85% |
-44.03% |
33.36% |
4.46% |
-9.26% |
| Fidelity FPS Glb Gth USD |
4.60% |
-44.74% |
30.90% |
2.13% |
-9.47% |
| United International Growth Fund |
7.63% |
-41.69% |
21.24% |
1.17% |
-10.00% |
| AB Glb Grth Trends-A SGD |
4.88% |
-53.42% |
26.87% |
-2.12% |
-11.38% |
| United Sure Fund |
3.36% |
-36.64% |
12.58% |
3.76% |
-11.42% |
| Eastspring Inv UT Global Basics SGD |
14.77% |
-47.10% |
47.99% |
12.83% |
-12.09% |
| Nikko AM Shenton Glb Opportunities |
31.93% |
-53.31% |
34.33% |
-4.47% |
-13.38% |
| AB Glb Eqty Blend-A SGD |
-0.55% |
-52.48% |
27.37% |
-3.72% |
-13.95% |
| DWS Glb Themes Eqty A SGD |
-2.48% |
-48.49% |
39.13% |
2.42% |
-14.88% |
| AXA WM -Talents Fund |
-7.26% |
-56.52% |
40.00% |
2.86% |
-22.22% |
Outperformance in bold. source: iFAST compilations, in SGD terms, dividends reinvested |
Over the past five years, few global funds have repeatedly beaten the benchmark. Aberdeen Global Opportunities and First State Global Opportunities Fund did it in 3 of the past 5 years, in 2007, 2008, and 2011. Eastspring Inv UT Global Basics SGD, beat the benchmark in 2007, 2009 and 2010.
While yearly outperformance is all fine and good, on a 5-year annualised basis, fewer funds have managed to beat the benchmark.
| Table 1.2: Annualised 5-year return, end-2006 to end-2011 |
| Eastspring Inv UT Global Basics SGD |
-2.28% |
| Aberdeen Global Opportunities |
-3.17% |
| MSCI World Index |
-4.61% |
| Henderson Hzn Glb Opp Fd A2 USD |
-5.15% |
| RIC World Equity II ClJ USD |
-5.80% |
| First State Global Opportunities Fund |
-6.09% |
| Fidelity Intl A-SGD |
-6.35% |
| Fidelity FPS Glb Gth USD |
-6.90% |
| United International Growth Fund |
-7.07% |
| Nikko AM Shenton Glb Opportunities |
-7.29% |
| HGIF Glb Eq Fund-A SGD |
-7.41% |
| United Sure Fund |
-7.48% |
| DWS Glb Themes Eqty A SGD |
-9.43% |
| AB Glb Grth Trends-A SGD |
-11.67% |
| AB Glb Eqty Blend-A SGD |
-12.98% |
| AXA WM -Talents Fund |
-14.69% |
| Outperformance in bold. source: iFAST compilations, in SGD terms, dividends reinvested |
As shown in table 1.2, only two funds have managed annualised 5-year outperformance. Eastspring Inv UT Global Basics SGD returned -2.28% while Aberdeen Global Opportunities returned -3.17%, and both beat the -4.61% return of MSCI Global Equities.
Both funds have comparable expense ratios: 1.73% for Aberdeen Global Opportunities and 1.76% for Eastspring Inv UT Global Basics SGD (as at 15 May 2012). One thing to note is the Eastspring Inv UT Global Basics SGD invests primarily in equities that operate in basic industries, which is a sub sector of global equities, and investors should be aware that their exposure to this sector will likely be heavier compared with other global equity funds.
But there’s a burning issue that needs to be addressed.
So What? All Your Funds Lost Money!
I can already hear the sharpening of knives and gnashing of teeth, as active management critics will quickly (and accurately) point out, “But none of these global equity funds made money!”
To be fair, it’s justifiably difficult to generate a positive return when the boarder market is in a downturn. A broad market downturn impacts all investors regardless of investing style, and the fact that Aberdeen Global Opportunities and Eastspring Inv UT Global Basics SGD have outperformed the benchmark, is a testament to their investment methodology.
Having said that, there happens to exist a global fund strategy, which has generated a positive return in 2011, and has also beaten the MSCI World Index over the past 5 years.
The Dividend Strategy To Wealth Accumulation
The fund strategy in question is DWS Top Dividende strategy. DWS Top Dividende is a restricted recognized scheme in Singapore. This means it is only available to accredited investors, and not to retail investors. However, investors who wish to gain exposure to the DWS Top Dividende investment strategy can do so through DWS Invest Top Dividend S2H(P) Acc SGD, which mirrors the exact strategy of DWS Top Dividende. Both funds are managed by the same investment team.
For the purpose of illustrating the strategy’s overall performance, we use data from the longer-running DWS Top Dividende fund. We also use returns in EUR terms, to allow for comparison with the SGD-hedged class (the SGD-hedge seeks to reduce the currency risk of fluctuations between the SGD and the EUR).
Chart 1 illustrates the performance of the strategy versus the MSCI World Index. Note that the MSCI World Index is not the strategy’s benchmark, but is used for reference purposes.
Table 2.1 displays the strategy’s return versus the MSCI World Index.
| Table 2.1: Calender year return, end-2006 to end-2011 |
| DWS Top Dividende |
7.08% |
-35.51% |
29.88% |
16.38% |
5.13% |
| MSCI World Index |
5.40% |
-41.90% |
32.49% |
3.50% |
-5.93% |
| source: iFAST compilations, MSCI World Index return in SGD terms, DWS Top Dividende return in EUR terms, dividends reinvested. |
Quite impressively, the strategy has beaten the index in 4 out of the past 5 years. And this translates into strong outperformance on an annualised basis, as shown in table 2.2.
| Table 2.2: Annualised 5-year return, end-2008 to end-2011 |
| DWS Top Dividende |
1.88% |
| MSCI World Index |
-4.61% |
| source: iFAST compilations, MSCI World Index return in SGD terms, DWS Top Dividende return in EUR terms, dividends reinvested. |
The strategy’s 5-year annualised return of 1.88% far outperforms the -4.61% index return.
This strategy’s returns, if successfully replicated in DWS Invest Top Dividend S2H(P) Acc SGD, could be the global fund that can reduce the hassle of constructing a portfolio by 50%. After all, the results speak for themselves. There’s just one thing…
One last thing
Investors who are considering DWS Invest Top Dividend S2H(P) Acc SGD need to remember that they are investing in a fund that mirrors the successful strategy of DWS Top Dividende.
This means that, while every effort is made by the investment team to manage the strategy consistently across mother and mirror funds, investors in the mirror fund may be exposed to similar but not the exact returns of the mother fund. This could possibly be due to imperfect security allocations between both funds.
Still, in terms of individual stock allocation, both mirror and mother funds are managed identically. And with the strategy’s excellent track record, investors have one more attractive fund to add to their list of options when considering global equity funds.
Conclusion
Portfolio construction can be daunting for first-time investors, and while we’ve identified a number of fixed income funds that have shown a strong track record, the track record for many global equity funds is less stellar.
Global equity funds with a strong track record include Aberdeen Global Opportunities, our 2011 Recommended fund for the global equity space, and with the launch of DWS Invest Top Dividend S2H(P) Acc SGD, investors will have one more attractive option to consider when building their portfolios.
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