JOHCM Global Opportunities Fund – added to the Charles Stanley Direct Preferred List

The global funds sector is highly competitive. Investors are well served by a multitude of actively managed funds, as well as competitive trackers that aim to provide returns in line with a global index of shares such as the MSCI World.

Trackers, or passive, funds are increasingly popular with investors, and with good reason. Much of the returns from global markets over the past decade have come from a small band of very large and exceptional companies. This includes members of the so-called ‘Magnificent Seven’ – Apple, Amazon, Alphabet, Microsoft, Nvidia, Meta Platforms and Tesla. Many of these businesses are thought to be key beneficiaries of the advances in artificial intelligence, and their size combined with their technological leadership means they cannot be ignored.

When the largest companies in an index are also among the best performing then hugging the performance of the index with a tracker makes perfect sense. Active managers will likely struggle to keep up in these circumstances, and there is little to be gained from a differentiated approach that prioritises factors other than potential growth rate.

Yet investment momentum can shift. Belief can turn to disappointment if earnings or business developments do not live up to expectations, at least in the short term, and the concentration of global markets into a small number of very large tech-enabled companies can create imbalances for investors. Already this year we have seen more dispersion in performance among this group of stocks, with significant sell offs for those that have had setbacks or not quite met earnings expectations. Investors have set them high bars to jump over.

An active alternative to a global tracker

For those that expect a broadening in stock market performance, diversifying into actively managed funds could be worth considering. There are a variety of good-quality funds that prioritise value characteristics while aiming to ensure sufficient quality, and these could provide useful diversification to passive funds and more growth-leaning active strategies.

JOHCM Global Opportunities is a fund our Collectives Research Team has recently identified as a candidate for this. The managers, Ben Leyland and Robert Lancastle, have a decent long-term record of keeping up with global markets when they rise but have also shown ability to preserve capital more when they fall. They have also shown strong stock selection over their five-year tenure, although past performance is not a reliable guide to future returns.

The process and philosophy of the fund is influenced by the now-retired John Wood, a well-known UK equity investor who had a unique approach to investing. Leyland joined J O Hambro to work with him in 2006 before later branching out into global equities, launching this global strategy in 2012.

As well as a concentrated portfolio where stock picking has a significant impact, the approach emphasises capital preservation. If insufficient attractive opportunities are identified, the managers are prepared to hold some cash, an unusual tactic as most funds tend to remain close to fully invested at all times. For instance, the managers took the cash weighting to close to its 10% limit in 2021 and, more briefly, almost to that level in November 2023.

In terms of stock selection, the managers stick to developed markets, seeking shares in good-quality businesses where there is underappreciated durability of earnings and cashflow. The fund is neither growth or value biased, instead exploring what the managers refer to as the ‘forgotten middle’ where quality, growth and value styles intersect. This sees the fund cluster around sector groups that evolve over time, including economically sensitive areas such as banks and energy that wouldn’t tend to be included in more strictly quality-focused funds.

Historically, the fund has generally delivered outperformance and protected capital well on a relative basis during market drawdowns. This has been due to a bias to strong business with undemanding valuations and the willingness to hold cash when the managers find valuations to be expensive. In contrast, the fund has tended to lag when lower quality companies are driving market returns, or when momentum in growth stocks is to the fore.

Our view on the fund

We have been impressed with how the managers have kept up with the global index in a golden age for tech stocks despite low exposure to the dominant names, although past performance is not a reliable guide to future returns.

The fund can be considered for part of an investor’s core allocation to global shares, especially for investors wishing to keep their portfolio anchored by characteristics of quality and value. It could also work well alongside traditional passive funds or more growth-focused active funds filled with tech stocks. We are pleased to welcome the fund to our Preferred List of ideas for new investment.