2015 Fund Awards: Global Growth and Global Equity Income

Best larger global growth fund

Old Mutual Global Equity

Last year's winner of the best smaller fund award in this category has grown significantly to qualify as this year's larger fund winner. It is overseen by Old Mutual's head of global equities, Ian Heslop, with co-managers Amadeo Alentorn and Mike Servent.

Explaining how Old Mutual Global Equity is run, Heslop says: "Different investment styles can work in different market environments. Within our strategy we will have multiple styles and thematics working within the portfolio at the same time. This diversifies our overall stock selection risk and has been very important in stabilising the return series we have achieved over the long term."

Put at its simplest, the managers look for the types of stocks, such as financial or healthcare, that other investors are buying, and then look for the best companies they can buy to take advantage of these themes.

Companies are selected on the basis of five specific criteria. The first four criteria are fundamental, based on balance sheet data including forecast earnings and profit and loss.

The fifth incorporates price information, helping the managers to understand the demand from other investors and availability of the shares in the market. The managers may focus more on certain company criteria rather than others, depending on market conditions at the time.

Heslop stresses that in seeking to determine the current market environment they are not making any forecasts.

"Instead we are trying to understand the type of stocks which will outperform based on the environment as it exists now," he explains.

"This dynamic and flexible approach recognises the cyclicality of investment processes and adjusts exposures to take advantage of prevailing market conditions."

As a result of this process the fund has a highly diversified portfolio in terms of sector, industry and stock composition, with its large number of holdings helping to mitigate risk. The portfolio is currently rebalanced three times a week.

He explains how the approach worked when there was a fall-off in investor sentiment around June 2014. This led to "defensive positioning at a stock and sector level, more specifically our underweight position to the energy sector and overweight position to healthcare sectors for most of the year". He adds: "The fund benefited from our ability to navigate out of the way of this type of environment, as the move towards quality measures safeguarded performance."

Heslop concludes: "With the market fluctuating between growth and value styles, we feel justified in maintaining a flexible, pragmatic style bias."

The 'A' share class was monitored for this award, with a three-year return of 78.09%. On Interactive Investor the 'P' share class is available, which returned 79.74%.

Highly commended larger global growth fund

Fundsmith Equity

Despite being only just over four years old, Fundsmith Equity has not only achieved a consistent performance record but has also made it into the 'larger' fund division. Since November 2010 it has grown to some £3.5 billion in size.

While it may be relatively young, its manager and the chief executive of Fundsmith, Terry Smith, has many years of City experience. He only stood down as head of broker Tullett Prebon a year ago.

He attributes the fund's success to its simplicity. "Firstly, we identify good companies, secondly, we buy their shares at a fair or better price, and lastly we seek to do the most difficult thing of all, nothing. This allows the great returns our portfolio companies generate to mount up and compound."

Smith likes to invest in things that will always be in demand, such as consumer staples, which make up nearly 40% of the fund's holdings. Technology and healthcare companies account for most of the rest.

He emphasises that the fund's performance has not been achieved through market timing - which he rigorously eschews - or trading in positions. The portfolio is concentrated, with under 30 holdings. Smith only sold one share in 2014. He believes it is virtually impossible to predict which way stockmarkets will move, but that the strength of the companies the fund holds will allow them to continue to grow their intrinsic value.

The 'R' share class was monitored for this award, with a three-year return of 70.65%. On Interactive Investor the 'I' share class is available, which returned 73.76%.

Best smaller global growth fund

Kames Global Equity

Although Kames Global Equity is long-established, its performance was not particularly notable until recently. Since Pauline McPherson became manager in 2011 its returns have improved dramatically. She says: "After taking ownership of the fund, improving its performance became a top priority for me."

McPherson describes herself as an "old-fashioned stock picker" who likes to run a concentrated portfolio. She believes that the key to a fund doing well is to avoid bad stocks and economic risk. Her co-manager, Neil Goddin, who joined the fund in 2012, is more statistically inclined. He ensures the portfolio does not become too exposed to economic risks, such as movements in interest rates or currencies.

"It is important to be aware of what you don't know, such as what will happen to the oil price," says McPherson. "We can look at companies but we can't predict the future." She is happy to take risks at company level and Goddin measures the economic risks.

As far as stock selection is concerned, there are three key stages in their investment process. First, there is an in-house screening process called the Kames Screen. Using quantitative scoring it reduces their potential universe of shares from around 5,000 to some 300 stocks. This is followed by qualitative and fundamental analysis focused on identifying the best investment ideas in order to construct a concentrated portfolio of 35 to 45 holdings, diversified across sectors and regions.

McPherson likes to seek out two types of companies for the fund - compounders, which generate good returns year after year thanks to their competitive advantage in the markets in which they operate, and tactical opportunities, which she describes as her "secret weapons", comprising companies she believes are on the road back to profitability.

These two groups of stocks typically account for around 80% and 20% of the fund respectively at any one time. She points out that their uncorrelated returns also help to reduce the fund's volatility.

She believes that the fund's concentrated but well-diversified portfolio and good risk controls have helped produce its consistent performance over the past three years. She cites two particularly successful investments during that period - Skyworks Solutions, a maker of semi-conductor chips used in mobile devices, and Tencent, one of China's largest internet companies. Tencent's share price is now nearly five times higher than when it was purchased for the fund in 2010.

Shares are more expensive now after a seven-year bull market, but there is also more volatility which can throw up opportunities for stock pickers, as the market often misprices the underlying fundamentals of a company. "We like to look where others fear to tread," McPherson says.

The 'A' share class was monitored for this award, with a three-year return of 49.73%. On Interactive Investor the 'B' share class is available which returned 53.14%.

Highly commended smaller global growth fund

FP Octopus International Equity

FP Octopus International Equity is run by a team of three managers - Bish Limbu, Simon Reynolds and Colin Lunnon. It is one of a range of multi-manager funds offered by Octopus Investments.

The managers say that the rationale behind the fund is that it provides diversification. They argue that by mixing different asset groups and using many fund managers it is easier to achieve consistent returns because the top-performing asset groups and fund managers tend to change each year.

They explain that within their multi-manager funds diversification is "managed", so there is less risk of unintentionally having too much money in one particular market or sector, which can occur with a collection of single manager funds. They also argue that a multi-manager approach ensures that there is constant monitoring of the managers to make sure they keep performing; those who aren't are replaced.

Octopus International Equity makes use of both passive index trackers and actively managed funds, which the managers believe provides flexibility and the potential for good performance while ensuring that the costs don't erode returns. Currently, the majority of the fund is invested in passives, including the top five holdings. Before including a fund, the managers undertake a rigorous and exhaustive due diligence process to ensure that the best funds and fund managers are selected.

The 'B' share class was monitored for this award, with a three-year return of 47.07%.

Best larger global equity income fund

Artemis Global Income

Global income funds are becoming increasingly popular among investors looking to broaden their sources of income. Although the number of funds in this arena has grown, Artemis Global Income has managed to achieve our top accolade in this category for the second consecutive year.

Manager Jacob de Tusch-Lec explains how the team tries to achieve consistency. "We mix and match between high-yielding/low-growth stocks and higher growth stocks with more average yields. Because we have a diverse group of stocks with different growth/yield profiles, we end up with less portfolio risk."

He says that dividend yield alone is not a reason to buy or sell a stock. So the main aspect he focuses on in the valuation process is how much free cash a company is generating in order to pay off both equity and debt holders.

His portfolio also tends to have a "value" bias towards companies that are cheaper than the global benchmark, and which tend to grow at a slower pace than the global universe because they pay out their cash to shareholders. It therefore contains relatively defensive companies in sectors such as utilities, telecoms and pharmaceuticals.

He attributes the fund's good performance to the portfolio's active rotation between various types of income stocks. In 2012/13 it was rotated out of quality income stocks that had looked attractive after the financial crisis and into European domestic stocks that were trading very cheaply. "As Europe has somewhat recovered since then, we have made strong profits," he says. "We have also made money in the US ."

de Tusch-Lec says that general economic considerations play a vital role in the portfolio construction process. He points out: "Having a clear view on where interest rates are going is important, as the performance of equities with high yields is often highly correlated with the direction and level of interest rates.

"Having a flexible and pragmatic investment process that can respond to a potentially different rate environment will be key."

The 'I' share class was monitored for this award, with a three-year return of 78.03%.

Best smaller global equity income fund

Standard Life Investments Global Equity Income

Standard Life Investments (SLI) is one of the UK's largest fund managers but the SLI Global Equity Income fund is still of a modest enough size to qualify for our smaller fund award. The fund's consistent performance has been marked since Kevin Troup took over as manager in January 2012.

Troup follows SLI's in-house investment philosophy which is called "Focus on Change". It is based on the premise that the stock market doesn't price the shares of companies correctly when they are undergoing - or face the prospect of - material change. The group believes that by exploiting this inefficiency its managers can achieve repeatable outperformance.

He explains that his aim is to build a portfolio of companies that he knows well, which will perform regardless of external events in the sector, the economy or the currency. The returns the fund produces are therefore determined as much as possible by what is happening at the company level.

That means Troup doesn't focus on a particular type of share. He explains: "I look not to screen out opportunity, so I don't have any initial criteria. I am also style-agnostic as I am looking for mispriced change occurring at the company level, which is not yet reflected in share prices.

"This can be in stocks which are perceived as growth or value stocks. But cash flow expectations which are different from the market consensus, or expectations around the volatility of those cash flows, are fundamental criteria."

He does not seek to maintain a certain spread of holdings in the fund in terms of country, sector or company size either. But he says: "I do aim to have as diversified a portfolio as possible - I look to have diversified income streams, with ideas coming into the portfolio from three different types of dividend income 'bucket' - dividend growth, dividend upgrade and high yield."

He says that the fund's good performance is the result of "lots of little stock-specific insights".

The 'Retail Founder' share class was monitored for this award, with a three-year return of 51.29%. On Interactive Investor the 'Retail Platform 1' share class is available, which returned 54.71%.