China’s policy challenges, the continued weakness in commodity prices, and the upcoming US reporting season all continue to weigh heavily on the minds of investors, according to Mercer’s year-ending 2015 Investment Sector Survey.
Following its regular quarterly review, Mercer believes it is still too early to begin increasing allocations to equities and other risk assets, and continues to recommend a neutral stance between growth and defensive assets.
Within equity and other risk asset markets, moreover, Mercer continues to favour a highly selective approach. We generally prefer to underweight regions like Australia and emerging markets, which are especially sensitive to the risks of a further sharp slowdown in China’s growth, while also continuing to seek relatively inexpensive means of hedging equity market exposure.
This latter approach leads us to favour unhedged developed market equities, where the expected further falls in the Australian dollar will help cushion downside risks to returns.
In what was a volatile year for Australian shares, the ASX 300 finished off the year with a solid monthly return of +2.7% in December driven by comfort around the Fed interest rate rise, culminating in a modest gain of 2.8% for 2015. Double digit returns were recorded in the Mid 50 (11.3%) and Small Cap (10.2%) segments as they remained the pick of the market capitalization spectrum over the year.
Clare Armstrong, a Principal in Mercer’s manager research group, said, “The strategies that performed strongly this year were stock pickers.
“We saw that several of the better performers also had a significant investment in smaller companies which drove their returns – when names like Blackmores and Bellemys are up 500% or 700% even small positions can influence returns relative to portfolios that are more limited in their mandates.
“Looking at the portfolio of the strongest performing fund, Bennelong Concentrated Equities, which rose 33.9% for the year, almost half of its outperformance came from holdings that were outside the Top 100 Index and some of these were not actually in the index. This highlights the benefit of looking for managers that are less constrained in their investment strategy.”
The year saw a marked divergence between sector performance, with negative returns in Energy (-27.7%) and Materials (-15.2%) almost offsetting the positive returns across every other sector in the ASX 300. The local sharemarket ended the year up 2.8%, boosted by strong performance across the Industrials (+16.7%), Healthcare (+16.2%) and REITs (+14.4%) sectors.
Ms Armstrong added, “As well as some small cap stocks, some classic large growth companies like CSL and Macquarie Group boosted returns. At the other end of the spectrum, strategies investing with a value style or in the largest companies posted flat or slightly negative returns for the year.”
“A number of managers investing with a value style held the large resource companies and with oil stocks and materials falling over the year many of these strategies underperformed.
“Many managers who owned the large resource companies have continued to hold them as they have fallen, believing that they represent good investments based on fundamentals, and that they are oversold”.
The median Australian shares manager outperformed the index by 0.9% over the 3 months to December, and by a solid 2.8% over the year. Over the past three and five years, the median manager has outperformed by 2.4% and 1.8%, respectively.
Active managers recorded strong outperformance over 2015 amidst a volatile market, with Targeted Volatility strategies remaining the best performing style over the past year with a return of +9.9%, outperforming the index by 7.1%. Targeted Volatility also performed strongly over the three years to December returning +15.7% p.a., outperforming the index by 6.7%. Long Short strategies did well in the December quarter, returning a solid +8.1%, and were the second strongest performers over the past year and three years, outperforming the index by 4.8% and 4.3% respectively.
Developed equity markets outperformed domestic equities with the MSCI World ex Australia returning +3.8% over the year on a hedged basis, and +11.8% unhedged as the AUD fell against most major currencies. Small Caps (+12.6%) narrowly outperformed the Broad Cap (+12.1%) index over the year, while Emerging Markets were down 3.9%. Similar to recent years, Value (+9.1%) has lagged Growth (+15.5%), underperforming by 6.4% over the year.
Across the sectors, Healthcare (+19.9%), Consumer Staples (+19.6%) and Consumer Discretionary (+18.6%) were the strongest performers, while Energy (-13.2%), Materials (-4.7%) and Utilities (+5.0%) were the weakest (all in A$ terms).
Outperformance of active managers were a lot less pronounced in Global equities compared to what we saw in the Aussie market. Long Only strategies (+12.6%) were the best performing style over 2015, narrowly outperforming their Long Short (+12.5%) counterparts to outperform the index by 0.8%. Long Short strategies recorded the strongest performance over the past three years, returning +27.3% p.a, outperforming the index by 3.4%.
The preliminary medians for the Mercer Surveys were as follows:
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