Global equity strategies offer investors a mechanism to reduce portfolio overlap, besides simplifying asset allocation decisions, according to Artisan Partners.
In a recent note titled “An institutional approach to using global equity mutual funds”, Artisan Partners points out institutional investors have recognized the merits of global investing by incorporating global equity mandates into portfolios at a faster clip.
Artisan Partners suggests fund investors can also embrace such strategies by making modest adjustments to their traditional asset allocation models.
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
Institutional investors embrace global investment strategies
Artisan Partners points out that sophisticated institutional investors have been adapting to globalization by incorporating global mandates at a faster pace. This is evidenced from the following graph wherein global equity fundings by institutional investors have increased 17 percent CAGR between 1997 and 2011:
However, on the mutual funds front, global equity assets have grown at a slower pace of 8 percent CAGR, within the Morningstar’s World Stock Category. This slower growth comes on top of 2.67 percent annual equity market return posted by MSCI All Country World Index.
Suggestive global approach to asset allocation
Artisan Partners explains that a traditional sample asset allocation model would involve investors typically selecting one or more funding options providing broad diversification to the U.S. and non-U.S. markets often distinguished by style (growth vs. value) and region. However, the actual number of funds and specific allocations to each category would usually depend on a host of factors, including the individual investor’s risk appetite and diversification goals.
The report suggests an investor can introduce a global bucket by simply reallocating a small portion of the U.S. and non-U.S. buckets. An illustrative allocation is provided below:
This is an easy approach to adopt global strategies as it doesn’t tinker with the traditional model and the corresponding weightings can be modified to suit individual investor’s profile.
However, Artisan Partners points out that this simplistic approach has a drawback as it has potential to create greater overlap in exposures and fund holdings.
Global equity allocation strategy
To obviate the above drawback, Artisan Partners suggests the following revised global approach to asset allocation wherein all non-U.S. categories and the U.S. large-cap category are replaced with an active global equity allocation strategy, while the U.S. small and mid-cap allocations are retained.
This model helps unlocking the potential for greater exposure to world-class companies on a global scale besides removing the potential for portfolio overlap. Interestingly, this global approach requires only a fewer funds, thereby helping a simplified asset allocation process, without sacrificing diversification.
Artisan Partners concludes with the advice that incorporating unconstrained global equity strategies into an asset allocation mix offers a potential for alpha creation, as the broader investment universe would translate into a larger number of potential investments, besides offering opportunities to identify attractive investments.
Full report can be found here.