Hedge Clippings enjoyed catching up on Sky Business this morning with an old colleague, and frequently quoted market commentator, Macquarie Wealth Management's Martin Lakos, along with Ric Spooner from CMC Markets. Discussing actively managed funds with a couple of market professionals who come from a different section of the market provides one with a different perspective, which is always useful. Amongst other things we discussed the underperformance of the Australian equity market over the past 12 months (actually over the past 10 years) compared with other markets, particularly the S&P500, and how Australian managed funds have fared in this environment.
Inevitably these types conversations tend to quote averages, which remembering the old adage that if "one's head is in the freezer, and toes in the oven, than your average temperature is comfortable", means averages can be misleading. However we did quote both the average return of actively managed equity funds in 2017 (+13.10%) against the return of the ASX 200 accumulation index at +11.8% which suggested they performed marginally, but not dramatically better. However as per the freezer and oven analogy above, there's a dramatic range amongst the diverse nature of Australian actively managed funds.
For instance, taking all funds and all strategies, the best performing fund returned 75%, whilst the worst fell 21%. The median return was 13.34%, with 55% of all funds outperforming the ASX200, and with 95% of all funds in positive territory. With this extreme distribution spread of returns, inevitably questions were asked: Whilst there was certainly a focus on funds investing in small and micro cap stocks, plus those with Asian or global mandates amongst the top performers, this was by no means universal.
Equally it is difficult for a manager to consistently perform in the top quintile year in, year out, but undoubtedly the best ones manage to do so, if not every year, then at least regularly. Another aspect discussed was that top performance does not necessarily equate to the best returns: Frequently what investors are looking for, particularly in the absolute return space, is effective risk management thereby resulting in limited drawdowns.
Further discussions ensued regarding fund flows - whether positive or negative. We were happy to report that fund flows were broadly positive, albeit they obviously favour the better performing funds. However when looking behind the reasons for increased fund flows, anecdotal evidence would suggest that self-managed superannuation funds, or at least their trustees, are significantly made up of baby boomers, who as a natural result of their age, or financial security, are now more risk aware and less focused on trading individual stocks on the market than they were 10 or 20 years ago. At the same time they tend to have significantly more capital to invest, either on a personal basis or within their SMSF.
The other great benefit of a properly selected portfolio of managed funds, apart from hiring the expertise required, is the diversification obtained as a result. With most actively managed funds holding between say 25 to 75 individual stocks, with careful selection of even just five funds, an individual investor can have exposure to 100 to 300 stocks across multiple sectors and geographical markets, providing excellent diversification of risk. Certainly there is not the individual involvement of market trading that many investors enjoy, but sometimes leaving it to the experts is a safer and more relaxing option.
