Are we seeing the end of globalisation?

Interactive Investor is 21 years old. To celebrate, our top journalists and the great and the good of the City have written a series of articles discussing what the future might hold for investors.

Interactive Investor's launch in 1995 was well-timed, coinciding as it did with the advent of a new era in investing that would use technology to "shrink" the world.

This, after all, was the year Amazon was launched from Jeff Bezos' garage in Seattle, while Bloomberg was still small enough for its news terminals to be brought to a standstill by the death of Grateful Dead guitarist Jerry Garcia.

During the 1990s, as investors started to look abroad for new stock opportunities, brokers either charged exorbitant sums for foreign trades - up to around £30 - or did not offer them at all. Some just offered certain household names, usually American, which generally meant a skewed range of wellknown consumer stocks.

Today, in contrast, buying Novartis, BMW or Samsung is easy: you can even keep a dollar account at the big brokers, thus minimising charges for processes such as dividend conversion.

In the fund arena, expansion abroad initially took the form of single-country and regional funds, which were seen as cutting edge in the 1980s and 1990s. They started by focusing on English-speaking US markets and then our closer neighbours in Europe.

Over time they moved on to the larger emerging market countries and finally to frontier market funds.

They were often a disaster in performance terms, however. They were some of the worst culprits for launches at the very top of the underlying assets' cycles. Management fees were also hefty. Often initial charges were in excess of 6% and annual management fees were 3-4%.

Bad timing

For example, one boutique asset manager, MIM (not to be confused with Macquarie), launched a Far East fund in the mid-1980s, shortly after Japan first opened up its financial markets to foreigners.

At the time, price/earnings (PE) valuations of Japanese stocks had risen to levels in the 70s and 80s. To put that in perspective, if you bought one of these stocks, it would take you 70-80 years to get your money back in earnings .

The MIM fund was managed by a chap in his 20s who drove a red Ferrari and liked to collect art, where at least he was ahead of the game.

Investment marketing means the largest inflows are attracted after a country has performed wellShamefully, many pension funds, advised by professional advisers and actuaries, also bought heavily into this fund.

Singer & Friedlander's South American fund was a similar case. It was launched shortly after inflation in Argentina reached an all-time high of 20,262% in 1990. You might order your lunch at a restaurant and the price would have doubled by the time you came to settle the bill.

Inflation in the country continued to average more than 200% for the next 25 years. The asset manager went under in 2008.

Premature and naive

Poor timing persists. It is a function of investment marketing that the greatest inflows are attracted after a country has performed well, which invariably means that the country or sector will soon be in for a rude shock.

For example, when Vietnam was hot in 2009-10, we saw a flurry of Vietnam fund flotations. Within a couple of years, they were trading at discounts of 30-50%. In the early days, the lack of connectivity in the global marketplace was both an opportunity and a drawback.

The trend to bundle international exposure into global funds is a recent phenomenonMany firms set up one-man offices to give themselves a semblance of proximity to the business world and stocks they had invested in. Sometimes, however, the culture was impenetrable.

Meetings with company managements often amounted to an exchange of gifts rather than an exchange of information, and they sometimes still do.

Bundled exposure

The trend to bundle international exposure into global funds is a surprisingly recent phenomenon. Partly, this is because very few asset managers had global reach. "Global fund" only became a buzzword in equities in the early 2000s, as communications developed rapidly.

In the fixed-income space, unconstrained global bond funds that invested in assets such as emerging market debt came much later, as asset managers struggled to find yield following rate cuts after the 2007-08 financial crisis. The crisis marked a turning point in perceptions.

The 'global' label attracts investors 'to the point of absurdity', according to Mark SlaterSince then, any event that might hurt international confidence in the UK has encouraged sterling-based investors to increase their overseas exposure.

Globalisation has been seen as the answer to everything, from the erstwhile rise in UKIP's popularity to Brexit.

It was also in part a response to the realisation that asset class diversification as a risk-reduction policy had largely failed in practice: in times of stress, asset classes have tended to rise or fall together.

Indeed, so overwhelming is the trend for globalisation now that among institutional investors, beauty parades for UK equity mandates have almost disappeared. There were just two in 2015.

However, the "global" label attracts investors "to the point of absurdity", according to Mark Slater, founder of Slater Investments.

The rise in nationalism across the world has created real opportunities for global stockpickersHe says: "If you put the word 'global' into a fund name, people seem to want to buy it, yet many global funds hold a completely random range of stocks, with UK-based managers often combining a haphazard selection of large overseas household names with a smattering of UK mid-caps, as they know the UK market in more depth.

"Some have as much as 40% in the UK, although the UK accounts for less than 8% of the MSCI World index."

The global village has also brought new challenges, in particular the difficulty of outperforming with any degree of consistency over the past decade, as markets have become more efficient.

However, the rise in nationalistic fervour being seen across the world has been creating real idiosyncratic opportunities for global stockpickers.

Disharmony factor

"Over the past couple of years, the globalisation trend has been in check," says Colin McLean, chief executive officer at SVM Asset Management.

"Austerity and lack of growth in productivity and real wages around the world have led to the election of politicians who have focused more on domestic agendas and appealed to a nationalistic tone. We have seen that in India, Russia and Turkey, and with the Brexit vote and Donald Trump's bid for power.

"This suggests some slowing in the harmonisation of regulation and accounting standards, and there appears to be widespread resistance to trade harmonisation initiatives such as the Transatlantic Trade and Investment Partnership.

"So the next few years may see more unbundling of globalisation."

This article was first published in our special publication 21: Twenty-one years of Interactive Investor. Download your digital copy for free here.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.