This week’s Morningstar Fund Radar shines a spotlight on global equity funds, revealing a stellar performance led by US tech giants and highlighting the political twists shaping investor sentiment worldwide.
The second quarter of 2024 proved favourable for global equity investors. Following a robust start to the year with the Morningstar Global TME Index delivering a 10.6 percent return in the first three months, an additional 3.7 percent was garnered in the second quarter, bringing the year-to-date return to a commendable 14.7 percent.
Once again, the US stock market led the charge, with the semiconductor sector stealing the spotlight, driven by high optimism surrounding the potential of artificial intelligence. Nvidia remains unchallenged in 2024, despite a recent decline after an almost disproportionate rise in its share price. Nevertheless, the company led by CEO and co-founder Jensen Huang achieved a spectacular return of nearly 160 percent in euros for the year up to the end of June. Nvidia’s stock market success briefly made it the most valuable listed company in the world in June.
Big caps dominate
It is noteworthy that the concentration in returns means that companies with the largest market capitalisation dominate stock market performance, making the momentum factor a defining characteristic in the first half of 2024. This is evident in the disparity between the returns of a market capitalisation-weighted index and an equal-weighted index. The return of the Morningstar Global TME Equal Weight Index remains stuck at a meagre 3.7 percent for the first six months of 2024, an underperformance of 11 percentage points compared to the market capitalisation-weighted index.
The dominance of large-caps is also visible over longer periods. Over the rolling three-year periods since July 2008, the equal-weighted index has posted positive returns relative to the market capitalisation-weighted index in only 10.8 percent of cases. The underperformance of the equal-weighted index over the most recent three-year period, from July 2021 to the end of June 2024, was 7.8 percent, marking the largest negative return differential in the time series. This highlights the significant challenges for actively managed funds, which typically invest less in mega-caps.
Another factor influencing investor sentiment was the political environment and the impact election results can have on local equity markets. In 2024, more than half of the world’s population will head to the polls, with election results in some countries not only causing political upheavals. For instance, the Mexican stock market fell by over 6 percent, and the peso also lost ground following Claudia Sheinbaum’s landslide victory. In India, local stocks were hit after the re-election of Narendra Modi, who, although securing a third term, is less firmly positioned after having to form a coalition.
France, UK vote
Political events are also significant in Europe. While the French were looking forward to a fantastic sports summer with the start of the Tour de France and the Olympics, they will also head to the polls. President Macron has placed the French in an uncertain situation by calling a snap election after Marine Le Pen’s right-wing Rassemblement National won the European elections. The party was the largest in the first round, with a second round of voting on 7 July. French shares reacted to the sudden uncertainty by going on sale. And one day before UK voters head to the polls, the Conservatives were expected to cede dominance to the Labour Party, altering the political landscape on the island.
That leaves the US main course after many amuse-bouches and appetisers. The looming question is who Donald Trump will face. Following an election debate between former President Trump and incumbent President Joe Biden, the latter has not quelled concerns about his health. This has intensified pressure within the Democratic camp over who should challenge Trump for the most influential political job in the world. These developments will be closely monitored by investors.
Morningstar Equity Global large-cap mixed category
The strategies prominently featured on Morningstar’s radar either possess a solid management team and investment process, according to the qualitative opinion of the fund analysts, or are credited with these qualifications based on an algorithm that evaluates investment funds using the same framework as the analysts. In this edition, we highlight a fund that meets these criteria within the Morningstar Equity Global large-cap mixed category.
Maj Invest Global Value Equities
Rated with a Morningstar Medalist Rating of Silver, Maj Invest Global Value Equities is continuing its track record recovery in the first half of 2024 after a successful 2023. The strategy is managed by a talented but compact team of portfolio managers who follow a well-structured and consistently applied process. Their high conviction-based approach is commendable, though not without risks. The strategy earns a pillar rating of Above Average for both People and Process.
Seasoned portfolio managers Kurt Kara and Ulrik Jensen have co-managed this strategy since its inception in 2005. The team was bolstered in 2015 when Rasmus Quist Pedersen joined as an analyst and became a portfolio manager in 2019. The trio work collaboratively yet relatively autonomously within Maj Invest. Although resources are limited and the strategy’s success heavily relies on the management team, extensive quantitative screening aids the managers in focusing on their equity research, while portfolio turnover is kept to a minimum. The team is not afraid to adopt contrarian ideas at times, maintains a long-term investment horizon, and firmly adheres to their convictions.
Despite its name, the strategy does not follow a pure value approach but rather targets quality stocks at a reasonable price. The internally developed quantitative model generates ideas by searching the investable universe using a comprehensive set of metrics that focus on a company’s stability, profitability, return potential, balance sheet quality, and valuation. Approximately 100 names remain for further examination.
Consistent return on invested capital
A key metric by which the trio measures a company’s quality is the level and consistency of its return on invested capital. They also assess the business model, market position, balance sheet strength, and management quality. While the managers strive for quality, they remain highly disciplined regarding the price they are willing to pay when selecting the 25-35 stocks for their portfolio. Consequently, they have favoured companies they believe could recover from a temporary downturn as valuations for top-quality and high-growth stocks became too high in their view.
The valuation-conscious approach has often posed challenges for the fund in recent years. While the strategy’s performance has been volatile as a result, it is reassuring that stock selection has contributed positively over several periods. In the first six months of 2024, returns were driven by positions in Softbank, Alphabet, Meta Platforms, and Micron Technology.
Jeffrey Schumacher is director manager research at Morningstar Benelux. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is an Investment Officer knowledge partners and takes an analytical look at a specific category of investment funds every Friday.