Global equity analysis: What separates the winners from the losers?

Returns-based style analysis from Markov Processes International reveals the factors that set the fund manager winners apart from the losers in global equities.

Global Equity funds’ performance ranges from -25.83% to slightly over 89% over the last 52 weeks (ending December 31, 2010), in euro terms. The best 5% of the funds outperformed the market (pegged to the MSCI World TR Index) by 12.6% and the worst 5% underperformed by approximately 25%. What role do favourable style allocations play? We take a closer look at common factors describing the best and worst funds on an aggregate basis.

When funds are aggregated in a group, their common factors crystallise and specific bets are diversified away, which provides the basis for such an analysis. Our analysis suggests that the top- and bottom-performing funds, on average, invested in quite different sectors which impacted their performance.

The performance of the top 5% was mainly a reflection of their selection and timing skills, having overweighted their exposures to Japan and emerging markets, as well as a sizeable exposure to cash. On the other hand, the bottom 5% display negative selection and timing skills, with very high exposures to global clean energy and cash. Using an attribution framework, we were able to quantify the impact of each bet on the overall performance. Please note that our conclusions may change if a different timeframe is used to select the best/worst funds.

• The universe is comprised of 567 funds that are classified under Lipper Global: Equity Global, with AUM of at least €10 million and denominated in euros. Our analysis only takes into account the performance of the primary share class, as defined in Lipper Hindsight.

• RBSA analysis of the universe suggests that the cash exposure for the managers in the universe tends to be higher for the worst performing funds. This large exposure might indicate that the funds use derivatives to hedge their different market and currency risks.

• The best performing funds display risk (as measured by the annualised standard deviation) that is in line with that worst performing funds as well as that for the rest of the universe.

• RBSA average exposures to different regions, over the past 52 weeks, suggest that the funds in the universe are mostly tilted towards the US, Japan, and Europe. 

• Based on the universe of 567 funds, the total annualised performance over the past 52 weeks ending on December 31, 2010 is calculated and used to rank the funds from best to worst. Using the top 5% (29 funds) and bottom 5% (34 funds), equally weighted – daily rebalanced portfolios are created and analysed within an RBSA attribution framework to try to understand why, on average, one group performed
than the other.