After a strong start, the 2014/15 financial year saw continued uncertainty in global markets culminating in a bleak finish to the year, Mercer’s 2014-15 Investment Sector Survey shows.
The month of June saw Australia record its worst monthly equity performance since September last year. This resulted in the Australian market posting its worst return in three financial years. The local market returned +5.6% for the year to June after posting formidable results in 2013/14 (up 17%) and 2012/13 (up 22%).
Global equity returns were a lot stronger. Over the financial year, an unhedged overseas shares investor would have received a return of +25.2%. This was aided by the strong depreciation of the Australian dollar relative to most major currencies.
Given the fall in the Australian dollar, the return for a fully hedged investor was reduced to +10.9%. Most fund managers in our survey have managed to exceed this index performance, although the outperformance margin is higher in Australian than global shares.
After several years of strongly directional global equity and bond markets, 2015 has brought more volatile returns to a wide range of asset classes. The risks of ‘Grexit’ and the bursting of China’s equity bubble were the two most recent sources of volatility, and follow the earlier collapse in energy and other commodity prices, and growing fears of deflation in Europe and other parts of the developed world.
Although Mercer does not consider any of these events poses a major risk to the global economic recovery, nevertheless the combination of rich equity and bond valuations, low and uneven global growth, and the prospect of an eventual rise in US interest rates, all point to a period of continued volatility. Against this backdrop, Mercer believes it is now opportune for investors to consider a more neutral stance between growth and defensive assets.
Despite underperforming global markets, the local share market (S&P/ASX300) produced two strong quarters in the middle of the 2013/14 financial year to return +5.6% over the year. The positive performance of Australian equities built on the strong returns posted over the preceding two financial years. The S&P/ASX 300 returned +17.3% and +21.9% respectively over 2013/14 and 2012/13.
Clare Armstrong, a Principal in Mercer’s Manager Research group, said “The performance of managers during these stronger quarters really drove the relative returns of managers over the course of the year.
“Those that did well earlier in the year were able to maintain their positions at the top of the league tables even as markets weakened. The rotation we saw in sectoral performance as the yield trade started to trade later in the financial year is masked in the full-year results.”
The median Australian Shares manager delivered an excess return of 1.4% over the year, compared to last year’s outperformance of 1.0%.
Income-Oriented managers were the strongest performing group over the last one and five years, outperforming the index by 4.6% and 3.1% respectively. Long Short managers outperformed their Long Only counterparts over the 2014/15 financial year.
“We are still seeing managers who have higher conviction portfolios or those with more latitude to express their conviction through short positions or through an allocation to cash performing more consistently through volatile environments,” Ms Armstrong said.
“That said, some patient investors enjoyed a huge turnaround in performance over the June quarter. The main trade that rewarded some managers in June quarter was underweight banks.”
Global equity markets were up 25.2% over the year on a unhedged basis, producing a much higher return than on a fully hedged basis (+10.9%), as measured by the MSCI World ex-Australia index. This was due to the strong deterioration of the Australian dollar against most major currencies over the year.
The strongest sector contributions over the year were from Healthcare (+43.9%), Consumer Discretionary (+35.1%) and IT (+34.8%), whilst a fall in the oil price in excess of 40% saw Energy (-9.5%) the only sector to post a negative return.
In Australian dollar terms, Global Small Caps returned a robust 25.3% marginally outperforming unhedged large caps, whilst Emerging Markets also returned a strong 16.5%.
The median Overseas Shares manager outperformed the index by 0.8% over 12 months to June. Over the past three and five years, the median manager has outperformed by a marginal 0.8% and 0.5%.
In contrast, the excess return gained from selecting an upper quartile manager was significantly higher. An upper quartile global equity manager would have outperformed by at least 4.6% over the year, and posted long-term (five-year) outperformance of 1.7% a year.
Conversely, a lower quartile manager would have underperformed by more than 1.1% over 12 months. A substantial difference of 5.7% when compared to managers in the upper quartile.
Similarly to domestic equities, Long Short managers (+27.6) outperformed their Long Only counterparts (+26.5%) over the 12 months to June. SRI strategies faired the poorest over the year, with the median manager returning +23.4%
The preliminary medians for the Mercer Surveys were as follows:
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