SKAGEN Global: equipped for excess return

The broad global equity fund, SKAGEN Global, which celebrates its twentieth anniversary in August, has delivered a return of around 15 percent* since start and beaten its benchmark in 15 out of 20 years. While 2015 was a good year for the fund, last year's results were not as promising.

The fund is currently positioned in such a way that it may now be able to make up for the losses from last year, and five factors in particular support this.

1. Lift from emerging markets

First, the negative trend that has plagued emerging markets since the financial crisis may have turned. Many of the companies in SKAGEN Global are exposed to emerging markets, including Unilever and Citi. If this new trend continues, it will have a positive impact on the portfolio.

Emerging markets performed extremely well in 2016, and had reached their highest point in five years by January this year. The improvement continued in February, according to the Institute of International Finance. By way of comparison, developed markets are expected to grow by less than two percent over the next few years.

For those looking to invest in funds with emerging markets exposure, it is advisable to select an active manager like SKAGEN; good stock picking is even more important here, where the largest companies are not necessarily the best. The largest companies are frequently to be found in the index, which passive funds invest in.

2. Oil companies face uphill struggle

Second, SKAGEN Global has very little exposure to the oil sector. The world's oil giants continue to struggle in the face of falling oil prices. In spite of Opec's production cut and some recovery lately, US shale oil manufacturers continue to put downward pressure on prices.

There is only one oil-related company in the portfolio, namely Lundin Petroleum, which constitutes 0.4 percent of the fund. By comparison, 6.7 percent of the fund's benchmark index, MSCI ACWI, is made up of energy companies (as of 28 February 2017). One of these is the world's largest oil and gas company, Exxon, which is the fourth largest company in the index.

3. Potential tailwinds from Europe

Third, SKAGEN Global's portfolio includes a number of European-listed stocks which may get a boost depending on the results of the upcoming elections in France and Germany. Rising populism and market-hostile policies may ensue in the wake of the elections.

If the expected political turbulence fails to materialise, or if it is weaker than anticipated, this may be favourable for the portfolio companies, in which case investors may be more inclined to take money out of the US and invest in European equities.

4. Peak for US stock exchanges

The fourth aspect is linked to the US stock market which is now trading at record levels and is in its eighth consecutive boom year. Over the past 12 months alone, the S&P 500 has gained 18 percent, Nasdaq 25 percent and Dow Jones 21 percent.

These high levels may indicate that a more moderate return may be expected over the next few years. Very few global equity funds are as underweight the US as SKAGEN Global. The strong dollar has also been a disadvantage for SKAGEN Global for several years, but if the currency weakens, this will likely be favourable for several companies in the portfolio, including export companies such as General Electric.

5. Risk-conscious portfolio managers

The fifth and final factor is the SKAGEN Global team's risk awareness. All the stocks that they buy should of course have an attractive upside potential, but downside production is also important. When stock prices rise, many investors get carried away and give in to the temptation to increase risk and focus more on the upside than the downside.

SKAGEN Global maintains focus on the downside and increased its exposure to a selection of defensive companies such as CK Hutchison, Medtronic and Unilever towards the end of 2016 when the market was selling in order to buy cyclical stocks. The three above-mentioned companies have contributed positively to the return so far in 2017.

 * Measured in EUR, net of fees, as of 28 February 2017.