Value strikes back, and IT 2020’s top performer

 

Australia, 19 January, 2021 – Mercer’s Australian Shares Investment Manager Performance Survey released today reveals that investment managers with exposure to Value as a style, and sectors such as Energy and Financials outperformed over the final quarter of 2020. Over the full year, the growth style-dominant IT sector outperformed, returning more than 50 per cent for the year. 

 

The strong performance of IT was largely on the back of secular trends that were accelerated by COVID-19, such as the trend towards online activity. Afterpay (payment platform) was the largest contributor to overall index performance. 

 

Consumer Discretionary was another strong sector over the year, a result of online activity rather than physical retail. The other strong performing sector was Materials, largely driven by the recovery in China with Fortescue, Rio Tinto, BHP and Pilbara all performing well over the recent quarter. 

 

Ronan McCabe, Head of Portfolio Management for Mercer in the Pacific said, “The final quarter of 2020 was very strong for equity markets with the ASX 300 returning 13.8 per cent and the ASX 50 13.2 per cent. Over the quarter the top three sectors were Energy, Financials and IT, respectively. Rebound in oil prices and easing of restrictions on bank dividends, in addition to improving economic outlook, were drivers of performance.”

 

McCabe added, “In a reversal of the prior two quarters, Value outperformed Quality/Growth. Value-esque stocks such as Woodside Petroleum, Rio Tinto, BHP, CBA, ANZ and NAB were the largest contributors to strong performance. While Value has had a tough time over the past few years, our perspective is that investors should seek to retain some Value exposure in their portfolios through the cycle. The recent quarter’s performance illustrates this nicely.”

 

On active management, McCabe noted that, “In what was a roller-coaster year for markets, Active held up very well. The median manager was slightly above benchmark over the year, while top quartile managers outperformed the benchmark by 2.5 per cent over the quarter and 3.9 per cent over the year. Over three years and five years, the top quartile managers beat the benchmarks by 1.2 per cent and 1.3 per cent respectively. This evidences the role of active management in investors’ portfolios. While selecting best in breed managers is difficult, it does come with its rewards.”

 

 

Australian Shares – All Funds

5 upper quartile funds in the past 12 months to end December 2020 (alphabetical order)

Fund

Style

Contributors to benchmark outperformance

Bennelong Concentrated Equities

Quality/Growth

·       Consumer Discretionary

·       Health Care

Bennelong Core Equities

Quality/Growth

·       Consumer Discretionary

·       Health Care

ECP Asset Management All Cap  

Quality/Growth

·       Information Technology

·       Consumer Discretionary

Hyperion Australian Growth

Quality/Growth

·       Health Care

·       Information Technology

Platypus Australian Equities

Quality/Growth

·       Health Care

·       Information Technology

 

5 lower quartile funds in the past 12 months to end December 2020 (alphabetical order)

Fund

Style

Contributors to benchmark underperformance 

Allan Gray Australian Equity

Value

·       Energy

Investors Mutual Equity Income

Value

·       Communications Services

·       Energy

Lazard Select Australian Equity

Value

·       Energy

Martin Currie Australia Real Income

Value

·       Real Estate

Nikko AM Australian Share Wholesale Fund

Value

·       Financials

·       Energy

 

 

Key Findings

 

  • Mercer’s latest Australian Shares Investment Manager Performance Survey reveals that in the final quarter of calendar year 2020, the median manager generated higher returns than the S&P/ASX 300 Index. This extends the outperformance of the previous quarter, when the median manager also beat the Australian equity benchmark. 
  • Over the one year horizon, the top quartile investment managers outperformed the market index by 3.9 per cent.
  • The median manager’s performance for the December quarter compared to the benchmark was slightly positive, outperforming the index by 0.1 per cent, with top quartile managers outperforming by 2.5 per cent. This marks a continued trend of positive benchmark-relative outperformance after a difficult start for managers in the first quarter of calendar year 2020.
  • The performance of the Value style managers was particularly strong in the most recent quarter, particularly in the Long Only sub-universe. 
  • Given the change in leadership from Quality/Growth managers to Value managers in the December quarter, the performance gap between the upper and lower quartile managers narrowed compared to the one-year period to end September. Also, the higher risk appetite of investors and rally in cyclical stocks resulted in the Targeted Volatility sub-universe lagging the benchmark significantly in the quarter. We believe that these changes highlight the importance of diversification when selecting a portfolio of active managers and strategies. 
  • Value stocks staged a strong rally in the last quarter of calendar year 2020, after having lagged growth stocks for an extended period. Stocks in the Energy sector (such as Woodside Petroleum and Oil Search) surged higher, as oil prices trended upwards. Australia’s major banks posted solid gains as restrictions on dividend limits were lifted by the regulator at the start of 2021, given the improving economic outlook. Conversely, defensive stocks lagged, such as gold miners (Newcrest Mining, Evolution Mining) and companies in the Healthcare sector (CSL, Cochlear, and Sonic Healthcare). As such, Value managers like Allan Gray and Martin Currie Australia performed well, while Quality/Growth managers like Bennelong Australian Equity Partners and Platypus Asset Management lagged in the December quarter. 
  • The S&P/ASX Mid 50 Index continued to outperform the S&P/ASX 300 Index in the December quarter, while the large cap S&P/ASX 50 Index lagged the market. This is a continuation of the trend seen in the previous quarter. The outperformance in mid cap stocks this quarter was driven by the likes of Mineral Resources (iron ore and lithium miner), Challenger (diversified financials) and Oil Search (oil & gas exploration & production).    
  • The top performing sectors over one year were IT, Materials and Consumer Discretionary; while the detractors were Energy, Utilities and Industrials. Over the past 3 months, Energy, Financials and IT were the largest outperformers versus the benchmark. The rotation into oil stocks and banks in the most recent quarter mirrors the trend seen in other major stock markets, particularly in the US.   
  • Other on-going influencing factors on investor sentiment include the pace of the economic recovery and the efficacy of the various Covid-19 vaccines being rolled-out globally. 

 

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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 more than 25,000 employees are based in 44 countries and the firm operates in over 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 USD $17 billion. Through its market-leading businesses including MarshGuy 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 or LinkedIn.

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