Mercer Quarterly Sector Surveys - Year Ended 30 June 2018

Mercer Quarterly Sector Surveys - Year Ended 30 June 2018

Mercer Quarterly Sector Surveys - Year Ended 30 June 2018

  • 23 July 2018
  • Australia, Melbourne

Local Winners Underweight Banks in Favour of Healthcare and Consumer 

The top performing strategies over the financial year in Mercer’s latest Australian Shares performance survey were those favouring the healthcare and consumer sectors over banking stocks according to Yee Hou Seck an Australian Equities Researcher in Mercer’s Manager Research Group. 

According to Seck the strategies that performed strongly for the year ended 30 June 2018 continued to be growth and quality-focused. However, also significantly underweight were financials, the major banks in particular.  

“We have observed that the leading strategies had some commonality in stock exposure that drove portfolio returns, both in large caps and small caps,” said Seck. “The stocks that stood out from the S&P/ASX 100 include CSL and Aristocrat Leisure, with returns of 39.5% and 37.0% respectively; and outside the S&P/ASX 100, IDP Education and Reliance Worldwide, with returns of 106.5% and 65.5% respectively. 

“Looking at the portfolios of three of the top five performers, Selectors High Conviction Equity Fund, Platypus Australian Equities and Bennelong Concentrated Equities, all are relatively more concentrated with higher active risk. Interestingly, these had significant underweights in banks for the past financial year, and instead overweight were the healthcare and consumer sectors. This highlights the benefit of being less constrained in an investment process.”

 

Falling Knives - Telecoms and Financials 

The strategies that ranked towards the bottom end of performance over one year to 30 June 2018 were value funds that were overweight financials and telecoms and exposed to the so-called falling knives within these industries. Bank stocks in aggregate, returned -6.7%, led by the -12.0% fall in Commonwealth Bank of Australia.  

“We have observed that the lagging strategies contained similar stocks that were likely to have been negative contributors to performance. The stocks that stood out from the S&P/ASX 100 include Telstra and AMP, with returns of -39.1% and -31.4% respectively. Looking at the portfolios of some of the bottom five performers, they are relatively less concentrated with lower active risk and with significantly more exposure to financials and less exposure to the healthcare or consumer sectors compared to the leading strategies.” 

 

Financial Year Ending 2018: Another Year for Alpha 

The latest Australian Shares survey release reinforced the continued outperformance of active management strategies over the S&P ASX 300 Accumulation (“index”) over the longer term periods. The median manager achieved excess returns before management fees above the index of 0.9% p.a. over the past three years, and 1.5% p.a. over the five years to June 2018. 

These results are in excess of the median published fee for Australian Shares wholesale unit trusts which range from around 0.7%-0.8% (depending on mandate size) according to Mercer’s Global Asset Manager Fee survey, providing evidence supporting the use of active management in this asset class. 

The ability to generate alpha however was very much dependent on the investment approach taken over the financial year. When analysing the excess returns broken down by the sub-universes within the Australian Shares survey, the results differed markedly. The largest of these subsets, the Long Only sub-universe, outpaced the index by 1.8% while their Long-Short counterparts and the Socially Responsible Investment (SRI) sub-universes both achieved a positive 2.2% excess return over the same period. 

Significant underperformance came from the Income Oriented and Targeted Volatility sub-universes which lagged the index by 5.9% and 4.4% respectively over the same one year period. 

The weakness of the Income Oriented strategies over the financial year was again underscored by the impact of exposure to the big banks in the pursuit of dividend paying securities. Seck noted that there is nothing wrong with the strategy of pursuing high dividend yields; it is how you execute it. You need to find the right balance between yield and capital growth.” 

The index itself returned 13.2% over one year to 30 June 2018 largely driven by the outperforming Energy, Materials and Consumer Staples sectors which collectively account for over 32% of the index weightings. It was the sixth consecutive financial year of positive performance and backed up the double digit returns of 13.8% achieved the previous financial year. 

Table A:

Mercer Sector Surveys - Australian Shares Universe

 

With reference to Table A, the upper quartile managers in the Australian Shares survey returned 17.3% in absolute terms, which is significantly higher than the average of the past 20 financial year returns of 13.4%, achieved by upper quartile managers. The Financial Year ending 2018 was the fourth best year of returns for upper quartile managers in the last ten years, which is impressive considering the negative impact from Financials, the single largest sector in the index, and also highlights the strength of returns from Materials, Energy, Consumer Staples and Healthcare. 

The Australian Shares survey covers over 160 different investment strategies offered by around 70 different fund managers. The top 10 performers over a one year period in the widely followed survey were as follows:

Mercer Sector Surveys - Performing Australian Shares Strategies
 

Overseas Shares - Technology Rally is Broader than FAANGS 

Growth stocks across different sectors featured amongst the portfolios of the top performing strategies over the financial year in Mercer’s Overseas Shares performance survey. Cyclical industries (including Energy, Materials, Consumer Discretionary and Industrials) outperformed more defensive industries (Utilities, Consumer Staples and Telecoms). Information Technology (IT) continued to perform strongly, which was reflected in growth continuing to outperform value styles. 

With investor exposure to IT stocks typically higher in this asset class relative to Australian Shares (the MSCI World ex Australia currently holds a 19% weighting to the sector versus less than 3% in the S&P/ASX 300), attention has inevitably turned to the performance of FAANG stocks, which refer to the popular acronym representing the most well-known global technology stocks Facebook, Apple, Amazon, Netflix and Google’s parent, Alphabet. 

Several of the FAANG stocks did feature prominently amongst the holdings of the top ten strategies, in particular Amazon and Facebook, with returns of 82.3% and 33.6% respectively. However, it was also observed that the top performing strategies had significant exposure to growth companies beyond the FAANGs. Two themes with a notable degree of commonality were healthcare equipment/life science tools and Chinese internet companies. Intuitive Surgical (robotic surgical tools) and Illumina (genome sequencing tools) contributed positively to a number of strategies, returning 59.3% and 67.1% respectively. On the Chinese internet side, Alibaba and Tencent (both internet conglomerates), also outperformed with returns of 36.7% and 45.7% respectively.  The two preceding themes were by no means the only growth opportunities on a global basis, other drivers include autonomous vehicles (Nvidia, a graphics chips company returned 70.1%), rising semiconductor content from automation/artificial intelligence (ASML, a lithography tools company returned 58.1%) and workflow automation (Salesforce, a customer relationship management software company returned 63.5%). In addition, the drop in the Australian Dollar against major currencies over the financial year also boosted returns in Australian Dollar terms. 

The Overseas Shares (Australian Investors) survey covers over 150 different investment strategies offered by around 55 different fund managers. The top 10 performers over a one year period were as follows:

Mercer Sector Surveys - Overseas Shares 

 

RESULTS

The medians (before management fees and taxes) for the Mercer Surveys* for periods to 30 June 2018 were as follows:

Mercer Sector Surveys - Performing Australian Shares Strategies 

*Universe data and rankings as at 3.24pm on 17 July 2018. .Stock returns are price returns. Index and stock returns are in AUD terms and sourced from Thomson Reuters Datastream. 

For further comments please contact Tracey Hayward, Mercer Public Relations Media Contact, tracey.hayward@mercer.com or 03 9623 5007.

 

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