From Nick Train to income: UK funds versus global versions

You could be forgiven for abandoning UK equity funds in recent years, especially as in some cases it has been possible to do this without giving up on your favourite UK managers. Nick Train is just one example of a manager who runs a global equity fund along the same lines as a UK fund. And global funds have been a way to take a more diversified approach without entirely missing out on a manager's top UK picks.

However, dark clouds hanging over the UK market may now have lifted, leading some investors to consider a bigger bet on domestic equities. But if the manager of a UK fund also runs a global fund, which should you go for?

From Lindsell Train to the value stalwarts

Highly regarded manager Nick Train runs LF Lindsell Train UK Equity (GB00BJFLM156) but is also a named manager on Lindsell Train Global Equity (IE00BJSPMJ28). And in recent years some professional investors have switched out of the UK fund into the global version.

Other UK funds whose managers also run global funds include TB Evenlode Income (GB00BD0B7D55), Trojan Income (GB00BZ6CQ176), Ninety One UK Special Situations (GB00B1XFJS91), Schroder Recovery (GB00BDD2F190) and ASI UK Smaller Companies (GB00B07T4859).

Broadly speaking, there has been a strong argument for buying the global option. A manager with a selective process has a broader choice of stocks if investing globally, and can diversify away from the UK market.

“My general view is that if you like the manager, and are choosing between a UK and global fund they run, you would tend to choose the global one because this investment universe offers a greater variety of opportunities,” notes Rob Morgan, pensions and investments analyst at Charles Stanley.

The global funds have also tended to outpace their UK peers over three and five-year time periods, something not surprising given the dire performance of the domestic stock market.

That said, a UK fund may be better for certain purposes – especially if you expect any recovery to continue. But either way, it is worth knowing just how much overlap there is between the two choices.

How different are they?

Put simply, not all of the UK and global funds run by the same managers appear to differ wildly. Some have major holdings in common and most have high one-year correlations. A perfect correlation is 1.

Adrian Lowcock, head of personal investing at Willis Owen, believes that this reflects the investment process shared by the different funds. “That [correlation data] effectively supports the point that, even though the funds are investing in different markets, it’s the process and philosophy that have a big impact," he explains. "This is especially the case over the past year when things have been less about which geography you invest in and more about the investment style.”

But it is important to remember that correlations are not static.

Some UK and global funds run by the same manager take the same big bets. This is most obvious with the Lindsell Train funds, which shared six top 10 holdings at the end of March. These were Diageo (DGE), RELX (REL), Unilever (ULVR), Mondelez International (US:MDLZ), London Stock Exchange (LSEG) and Heineken (NV:HEIA).

LF Lindsell Train UK Equity had 49.3 per cent of its assets in these six names at the end of March and Lindsell Train Global Equity had 38.7 per cent of its assets tied up in the same shares. While the global fund had just 34.1 per cent of its assets in the UK, the overlap can be greater if a UK fund also buys overseas shares. UK equity funds can have up to 20 per cent of their assets in overseas stocks.

This means that, in general, it would not make sense to hold both funds given the overlap. 

And, often, funds such as LF Lindsell Train UK Equity tend to have something of a global flavour given their focus on large-cap stocks. With names like this, the argument for favouring the global fund holds up – provided the managers have expertise and resources that extend beyond the domestic stock market.

Lindsell Train Global Equity's performance has tended to be strong versus its rivals – even if the fund has lagged the Investment Association Global sector average over the past year. Matthew Bird, chartered financial planner at Falco Financial Planning, adds that the global fund can access stocks of higher quality than its UK counterpart can.

"In the accountancy software sector, Intuit (US:INTU), which the global fund holds, has far higher growth and profit margins than Sage (SGE) – a top 10 holding of the UK fund," he notes. "The global fund also has Walt Disney (US:DIS), Nintendo (JAP:7974) and PayPal (US:PYPL), all of which have been great performers that the UK fund has no exposure to."

Other broader considerations are important. Holding a global fund involves a level of outsourcing when it comes to geographical allocations so you should be happy with how the fund is positioned. And it creates the possibility of stock overlap if you also use regional equity funds. Many global funds have heavy exposure to the US, although Lindsell Train Global Equity and a few others are an exception to this.

Lowcock adds that investors should consider how many alternative funds are available in a given region. “For example, the UK has a lot of very good smaller companies fund managers but the global small-cap choice is more limited,” he notes.

Should you bother with the UK?

The appeal of overseas markets versus the UK, even in the event of a further value rally, is hard to deny. But investors may opt for the UK as a pure play on the trend. And for a value or recovery play the domestic route may be attractive.

ASI UK Smaller Companies Fund, which currently shares respected investor Harry Nimmo as manager with ASI Global Smaller Companies (GB00BBX46522), may appeal. Similarly, UK value funds, including those run by Ninety One and Schroders, may be a purer play on a continued rally for cyclicals.

UK equity income funds, meanwhile, tend to capture a higher yield than their global equivalents. For example, TB Evenlode Income recently listed a historic yield of 3 per cent compared with 2 per cent for TB Evenlode Global Income (GB00BF1QNC48).

This comes at the cost of diversification, although global funds can be more concentrated than UK funds. For example, ASI UK Smaller Companies had 64 holdings at the end of March while ASI Global Smaller Companies had 44. TB Evenlode Income had 41 holdings at the end of March compared with 38 in its global peer.

The greater number of holdings may reflect the theoretically higher risks of investing in a single region rather than several.