Holding Their Nerve in Crisis Pays Off for Active Fund Managers
Published on The Australian Business Review 16/7/2020 (Original Article Here, subscription required) – David Rogers
Mercer’s latest Australian Shares Investment Manager Performance survey shows encouraging results for active fund managers, with the median fund outperforming benchmark share indexes over the past year thanks to a huge rebound in share prices during the second quarter.
After a particularly tough first quarter, when the global spread of coronavirus from China and the unprecedented measures taken to contain the virus triggered the fastest-ever bear market, funds that held their nerve and bought the dip were rewarded with strong gains after unprecedented fiscal and monetary stimulus and a faster-than-expected reopening of the global economy.
Consistent with a surge in healthcare and information technology stocks over the past year, funds that focus on quality and growth tended to outperform in the year to June, while steep falls in the energy and financials sectors made it another challenging year for value managers.
The results came after a near 30 per cent bounce in the benchmark S&P/ASX 200 index from its March 23 low to the end of the financial year, which included an 85 per cent lift in the information technology sector.
Mercer’s top 10 funds for the year to June are QVG Long Short, Hyperion Australian Growth, Collins St Value, Platypus Australian Equities, Katana Australian Equity, Panther Trust, Australian Eagle Long Short, Bennelong Concentrated Equities, ECP All Cap and Bennelong Core Equities.
But there were quite a few value funds among the top 10 long-only funds in the June quarter, helped no doubt by a strong bounce in the energy, consumer discretionary, materials and real estate sectors, even though the IT sector came back with a vengeance, led by Afterpay.
Steve Johnson’s Forager Australian Value fund scored a 39.6 per cent return, making it the best-performing long-only fund in the quarter. Katana Australian Equity Fund was second, with 31.8 per cent, followed by Panther Trust, – which was also fifth over one year and first over three years.
Rounding out the top 10 last quarter were DNR Capital High Conviction, Smallco Broadcap, Merlon Concentrated Value, Collins St Value, ECP All Cap, First Sentier Large Cap, and Perennial Value.
Phil King’s Regal Funds Management beat long-short funds with a 30.8 per cent return last quarter, while Australian Eagle returned 25.4 per cent and Tribeca Alpha Plus made 21.7 per cent.
The median long-only and long-short funds both returned 17.7 per cent and the median SRI (Socially Responsible Investing) fund made 17.8 per cent versus 16.8 per cent for the S&P/ASX 300 index.
Interestingly, the median SRI fund also beat the median long-short fund over the year to June and performed almost as well over three and five years, which tends to support the idea that responsible investing can also add to performance by boosting portfolio quality.
Overall it was an improvement for active fund managers in Australia from the experience of the decade since the global financial crisis where passive funds tended to outperform amid plunging interest rates, surging central bank liquidity and crowding into the large tech stocks.
Over three years, the median active fund surveyed by Mercer returned 5 per cent a year versus 5.2 per cent for the benchmark, while over five years the median return was 6.4 per cent a year — only marginally above the benchmark return of 6 per cent.
“The high-level theme has been the outperformance of quality growth versus value, but within that you will have certain managers that will do exceptionally well with more of value bent,” said Ronan McCabe, Mercer’s head of portfolio management for the Pacific region.
“That hits a key point that while we do believe in active management, I think picking active managers is tough. It’s not straightforward, it’s as much an art as it is a science. For investors doing their due diligence, it’s not just a case of putting a manager in a certain box. There are managers that can still outperform their index even when their style is against them.”
Speaking exclusively to The Australian, Mr McCabe said that even with interest rates at record lows and potentially going lower, central bank liquidity remaining high and potentially going higher along with fiscal largesse, barring a complete abatement of the coronavirus crisis, the next decade could be different to the last.
“The previous 10 years was very much about having broad market exposure,” he said.
“That certainly strengthened the passive versus active investment argument after the global financial crisis, but I think with interest rates and asset markets where they are now, forward-looking returns are going to be lower than they were in the past decade. So there’s a strong argument that active management will be much more relevant.”