From worst to best: Financials bounce back

 

Australia, July 19, 2021 – The banking sector has rebounded from being among the worst performers of the 2020 financial year (FY) to among the best for the 2021 FY, as revealed in Mercer’s Australian Shares Investment Manager Performance Survey. The survey also demonstrated the continued recovery of Value stocks, and the outperformance of active management.

 

The second quarter of 2021 was strong for equity markets with the S&P/ASX 300 returning 8.5% and the corresponding S&P/ASX 50 index, 8.2%. IT and Consumer Discretionary were the leading sectors delivering double digit growth respectively over the quarter, followed next by Communication Services. Over the one-year time horizon the S&P/ASX 300 returned 28.5%, while the ASX Small Ords returned 33.2%.

 

Banks reaped the benefits of a strong economic recovery, in particular an improved outlook for bad debts and overall asset quality as the predicted loan losses from the pandemic failed to materialise. Alongside Financials, Materials was also a leading contributor to index returns, buoyed by the Chinese economy’s rebound and resulting high iron ore prices.

 

At an individual stock level, CBA was the largest stock contributor over the financial year, followed by ANZ, Fortescue, BHP, NAB and Westpac.

 

Ronan McCabe, Head of Portfolio Management for Mercer in the Pacific said, the last 12 months was a story of two halves.

 

“While the second half of 2020 was a strong period for Quality/Growth managers, as markets rallied from the March 2020 Covid lows, the last six months of the financial year have seen a recovery in Value stocks, and in particular Financials and Materials,” said Mr McCabe.

 

“Cyclical stocks in the Financials, Materials and Consumer Discretionary sectors typically outperform the market as they are able to benefit from the upswing in earnings and profitability. Stocks that are more sensitive to the economic cycle have seen earnings recover strongly and share prices soar.”

 

Mr McCabe said the surveys continued to demonstrate the importance of active management.

 

“Quarter after quarter, we are seeing strong performance from top quartile managers who are beating the benchmark by sizeable margins over the one-year, three-year and five-year time horizons. And, both Value and Quality/Growth styles have done well at different times. These results support the case that active management from high quality managers enhances portfolios. It’s clear that it pays to have diversified managers and styles across investors’ portfolios,” said Mr McCabe.

 

Over the one-year time horizon:

  • The S&P/ASX 300 Accumulation Index was up 28.5%, benefiting from the rebound in market sentiment from April 2020 onwards after the sharp correction in March 2020.
  • The rally was broad based with most sectors generating a positive return. Cyclical sectors like Financials, Consumer Discretionary and Materials were the biggest contributors to index returns.
  • At an individual stock level, CBA was the largest stock contributor over one year followed by ANZ and Fortescue Metals Group. Other banks and miners, such as NAB and BHP, were also positive contributors. 

-ENDS-

 

Australian Shares – All Funds

 

Five above-median funds in the past 12 months to end June 2021 (alphabetical order)

Fund

Style

Contributors to benchmark outperformance

Bennelong Core Equities

Quality/Growth

·         Consumer Discretionary

ECP AM All Cap

Quality/Growth

·         Consumer Discretionary

·         Information Technology

Hyperion Australian Growth

Quality/Growth

·         Communication Services

·         Information Technology

Maple-Brown Abbott Australian Share

Value

·         Financials

·         Materials

Perpetual Australian Share Fund

Value

·         Consumer Discretionary

·         Materials

 

Five below-median funds in the past 12 months to end June 2021 (alphabetical order)

Fund

Style

Contributors to benchmark underperformance

AB Managed Volatility Equities

Low Volatility

·         Consumer Staples

·         Financials (underweight)

Acadian Australian Equity Managed Volatility

Low Volatility

·         Consumer Staples

·         Financials (underweight)

Martin Currie Australia Real Income

Value

·         Real Estate

Plato Australian Shares Low Volatility Income

Low Volatility

·         Consumer Staples

·         Financials (underweight)

State Street Australian Equity Fund

Low Volatility

·         Consumer Staples

·         Financials (underweight)

 

Key Findings

  • For the full financial year ended June 2021, the median manager generated higher returns than the S&P/ASX 300 Index. This is a continuation of the outperformance seen in the previous financial year, when the median manager fell less than the Australian equity benchmark. The performance gap between the upper and lower quartile managers has narrowed compared to FY 2020. While cyclical stocks continued to rise in the last quarter of the financial year, there was a notable resurgence of interest in growth stocks, resulting in a reasonably broad-based rally. We believe that these changes highlight the importance of diversification when selecting a portfolio of active managers and strategies.
  • Market trends and stock leadership seen in the first three quarters of the financial year saw some reversal in the last quarter. While cheaper cyclical stocks like Bluescope Steel and Boral continued to outperform, high growth stocks that had been sold down in the IT sector, such as Altium and Megaport, also staged a strong rally. As such, while Value strategies like Maple-Brown Abbott Australian Share and Perpetual Australian Share Fund performed well, growth managers like ECP Asset Management and Hyperion Asset Management also outperformed the median manager in the June quarter.
  • The top performing sectors over one year were Consumer Discretionary, Financials, IT and Materials, while the detractors were Healthcare, Utilities and Consumer Staples. Over the past three months, IT, Communication Services, Consumer Discretionary and Materials were the largest outperformers versus the benchmark, while Utilities was the weakest performing sector.
  • The median manager’s performance for the June quarter lagged the benchmark, underperforming by 0.5%, while top quartile managers exceeded the benchmark by 0.4%. This marks a deterioration in benchmark-relative outperformance after three quarters of the median manager exceeding the benchmark. 

 

About Mercer

 

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s approximately 25,000 employees are based in 43 countries and the firm operates in 130 countries. Mercer is a business of Marsh McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of $17 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com.au. Follow Mercer on Twitter @MercerAu and LinkedIn.

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