Active, high-conviction managers come to the fore
in tougher market conditions over 2015/16
The 12 months to 30 June 2016 saw lacklustre growth as equity markets were hampered by significant bouts of volatility spurred by fears of global economic destabilization. In such times, high-conviction active management tends to deliver stronger performance, according to Mercer’s 2015/16 Investment Sector Survey, released today.
Equities plummeted in August 2015 and January 2016 against a backdrop of collapsing commodity prices and fears of a slowing Chinese economy, and then corrected again immediately after the unexpected vote for “Brexit”.
Each of these short-term scares were soon followed by rallies that took most equity markets back close to their previous levels, but with insufficient impetus to make any significant gains for the year.
Clare Armstrong, a Principal in Mercer’s Manager Research group said: “The benefit of active management is usually most evident in more challenging markets. The last year provided plenty of evidence that this remains the case. Markets were volatile from month to month; rising half the time, falling the other half, without much sideways in between.
“In the two most difficult months, falls were greater than 5%. The managers that protected portfolios best during the most volatile months were the strongest performers over the year, Ms Armstrong said.
“The common feature of stronger-performing portfolios was that they were high-conviction stock pickers, not only showing leadership in falling months but well positioned in the rising markets too.
“The dispersion between the better and the weaker strategies has widened in the last 12 months, but the the median return doesn’t tell the whole story. Bennelong generated a return of 28% for investors in its portfolio, whilst the strategies more exposed to resources and to larger cap stocks lost more than 5% in value.”
“Some strategies with the latitude to take short positions did even better than that, which again highlights the benefit to investors of having more levers to pull in portfolios during tougher market conditions,” Ms Armstrong said.
Government bonds provided some of the strongest performance for the year despite low or even negative yields.
Unfortunately the outlook for the next 12 months looks little different. With elevated global risks, there are currently no asset classes offering particularly compelling value. This is reflected in Mercer’s current Dynamic Asset Allocation (DAA) view that investors now need to keep a relatively neutral overall portfolio exposure to equities, while maintaining some level of downside protection, such as a low currency hedge ratio or exposure to ‘low volatility’ shares.
The medians for the Mercer Surveys were as follows:
The 2015/16 financial year saw equities continue their downward trend from recent years to post a return of 0.9%. Unlike the formidable double digit growth of 2012/13 and 2013/14 of 22% and 17% respectively, the last two financial years have seen more modest growth of 5.6% in 2014/15 to 0.9% over 2015/16. Despite 3 consecutive months of growth after its lowest point over the year in February, the S&P/ASX 300 Accumulation Index did not return to its peak over the year, which occurred in July 2015.
The median Australian Shares manager delivered an excess return of 1.3% over the year, compared to last year’s outperformance of 1.4%. Over a five-year period, the median manager outperformed by 1.3% p.a. Managers who performed in the upper quartile of the peer universe have outperformed by at least 4.8% over the year, and posted long-term (5 year) outperformance of 2.9% p.a.
An investment of $10,000 in the Australian share market would have risen to $15,916 over the last 10 years. A comparable investment in unhedged overseas shares would have risen to $15,387 according to the MSCI World ex Australia Index (NDR).
Global equity markets were up 0.4% over the year on an unhedged basis as measured by the MSCI World ex Australia index (NDR). This was a noteworthy decline from the previous 3 financial years in unhedged terms: 2012/13 (+33.1%), 2013/14 (+20.4%) and 2014/15 (25.2%). The index returned -1.4% in hedged terms over the year.
More specifically, based on the relative performance of the S&P Developed ex-Australia Large & Mid cap indices, Growth (+1.5%) stocks outperformed Value (+0.3%) stocks in A$ terms. The strongest sector contributions over the year were from Consumer Staples (+17.3%), IT (+4.9%) and Utilities (+18.7%) whilst Financials (-10.5%),Consumer Discretionary (-3.1%) and Materials (-6.0%) were the sectors to post the biggest negative returns.
In A$ terms, Large Caps as measured by the MSCI World Large Caps index returned a positive 0.5% while their Small Cap counterparts returned -0.7%. Meanwhile, the MSCI Emerging Markets index returned -9.2%.
The median Overseas Shares manager underperformed the index by 0.4% over the financial year to June. Over the past three and five years, the median manager has outperformed by a marginal 0.3% and 0.4%. 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 2.4% over the year, and posted long term (5 year) outperformance of 1.3% pa. Conversely, a lower quartile manager would have underperformed by more than 3.9% over the year, a substantial difference of 6.4% when compared to managers in the upper quartile.
Targeted Volatility were the strongest performing group over the year to June outperforming the index by 10.6%.
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