Investors sticking to the traditionally high quality, conservative part of global bond markets may be surprised to learn that they are more exposed to riskier credit now than prior to the GFC.

Unlike high quality AAA-rated bonds, a BBB bond is only one or two downgrades away from ‘high-yield’ or ‘junk’ status. When the economy turns sour, these companies can quickly find themselves relegated.

At the start of 2000, the BBB-rated market was worth around US$400 billion, or one third of the total investment grade market. By the end of June 2018, this had grown to $2.3 trillion, compared to a total market value of $5 trillion (see chart below).

The value of the US BBB-rated corporate bond market is growing

Chart - US corporate bond market value vs US BBB-rated Corporate Bond market value

Source: Lonsec, Bloomberg

Bloomberg Barclays US Corporate Bond Index

Globally, companies are increasingly prepared to push their debt ratios higher to fund expansion, and they have found an audience of investors keen to squeeze extra yield from their portfolios. This demand is reflected in US spreads on BBB bonds, which have moved lower and converged with AAA spreads over the past two years (see chart below).

AAA and BBB spreads have converged

Graph - Spread of AAA-rated bonds vs Spread of BBB-rated bonds

Source: Lonsec, FRED

ICE BofAML US Corporate Option-Adjusted Spread

Firms have also sought to lock in access to cheap finance for as long as they can, meaning investors are not only exposed to lower quality credit, but may also be exposed to bonds that are more sensitive to moves in both underlying yields and a widening in credit spreads. In contrast to the global landscape, Australia’s investment grade bond market is dominated by financials, meaning exposure to BBB bonds is comparatively lower.

Investment managers at the conservative end of the risk spectrum, such as pension funds and insurers, rely on the investment grade market for stable and predictable returns. But the ‘risking-in’ trend means that even the safest parts of an investor’s portfolio might not be as safe as they think, and could be exposed to ‘glittering junk’ – companies that appear to offer safe yields but are at risk of being crushed by debt when their equity value falls.

Release ends

SuperRatings’ response to the Productivity Commission’s draft report on efficiency and competitiveness of superannuation indicates support for a review of the current system, with insight provided into some of the draft findings and recommendations where we foresee implementation issues that could potentially present challenges.

View the full response here

What can fund managers learn from the most successful World Cup teams? For every on-field win, there is a lot going on behind the scenes, and the same is true for Australia’s leading investment managers. Here are some universal tips on how funds can set themselves up for lasting success, based on the match-winning habits of the stars of the world game.

1. Beware the star player model

After winning the match against Portugal, Uruguay’s Edinson Cavani was struck out with a calf injury and forced to sit out a two-goal loss to France. In the risk management literature, this is known as key person risk. If your star portfolio manager leaves, your fund may underperform and you may be forced to change up your entire investment strategy. Successful teams reduce their reliance on a single star player by developing their other players and fully utilising the field. Having said that, it doesn’t hurt to have a few flamboyant strikers.

2. Maintain discipline

Winning teams are able to maintain focus and stick to their game plan even when the match is moving against them. Belgium’s astounding comeback against Japan from two goals down shows that discipline wins games and complacency loses them. Don’t panic when volatility rears its head or the market corrects. Stick to your investment strategy and make sure you are doing what you told your investors you would do. Timing the market is hard, and the chance of success diminishes rapidly when you are overcome by fear.

3. Take responsibility

When things go pear-shaped, avoid losing your head and admit when you have made a mistake. As we learned from the bizarre theatrics of Brazil’s forward Neymar, a refusal to take responsibility on and off the field will quickly see your fans disappear. Likewise, fund managers who blame the market for not doing what it should have done are unlikely to build trust with their investors.

4. Remember to score

This may seem like an obvious point, but scoring goals is the key to winning matches. Don’t be like the Australian team and overload your defence at the expense of scoring opportunities. Balance risk and return appropriately and if you have an active mandate, use it. If you are an active equity manager wondering why your investment product is being overtaken by smart beta alternatives, remember what you are there to do: generate alpha. Locking up play might work in the early rounds, but it is not a World Cup winning strategy.

5. Review your strategies

Successful teams continually assess their strategies against different sides by reviewing game footage and analysing their opponents. Investment managers should plan for a range of different market scenarios, including the worst-case scenario, and test investment hypotheses in a clinical manner. Assess your fund’s track record over long time periods and through different economic and market conditions. A lot has changed since 1966, and what worked then may no longer work now. The best teams can adapt to new ways of playing while identifying what still works.

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2018 Lonsec Research Pty Ltd, ABN 11 151 658 561 AFSL 421 445. All rights reserved. Read our Privacy Policy here.

Don’t bother calling your broker when the World Cup is on the TV. Analysis of share volumes shows there is a noticeable dip in the number of trades during World Cup matches in which the market’s national team is playing.

Happily, most World Cup matches this year have been scheduled during European evenings or weekends, leaving traders free to focus on their job during the day. But when matches are played in the afternoon, it seems it can interfere with the critical period leading up to the market’s close, when a very high proportion of trades are cleared.

Using World Cup contender France as an example, the French national team has played two matches corresponding with the final 90 minutes of Paris trading. Compared with the final 90 minutes of recent trading days, both ended up being the second- and third-lowest volume periods.

French CAC 40, volume in final 90 minutes of trading (million)

Source: Lonsec, Bloomberg

As the chart above shows, volume in the final 90 minutes of trade on 26 June (France v Denmark) was around 36 million, and on 6 July (Uruguay v France) it was around 35 million. This compares to an average volume for the period of around 45 million, although this number is skewed by the high-volume period on 15 June when trade-related fears gripped Europe’s markets.

France is not only beating the competition on the field, it is also leading its rivals in share market performance. While it has been a rocky start for European shares since the start of the year, the French CAC 40 index remains ahead of the UK, Belgium and Croatia, as well as world game juggernaut Germany, bouncing back from the global share dip at the start of 2018.

Performance of World Cup qualifying markets (H1 2018)

Source: Lonsec, Bloomberg

Release ends

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2018 Lonsec Research Pty Ltd, ABN 11 151 658 561 AFSL 421 445. All rights reserved. Read our Privacy Policy here.

One of the issues Lonsec has discussed within our investment committee process is the potential rise in market volatility and what it means for portfolios. Our view is that volatility is on the rise and that the likelihood of downside risk has increased.

There are various ways of incorporating such views within the context of a portfolio. One of the ways Lonsec seeks to incorporate these views within our diversified portfolios is to manage the ‘systemic market risk’ (beta) within our portfolios via an allocation to investment strategies that have the flexibility within their portfolios to manage their beta exposure. A portfolio with a beta of less than 1 should perform better in a down-market and lag in an up-market.

Consistent with our view, we have been increasing our allocation to investment strategies that have the ability to vary their beta exposure. For example, in the Australian equities component of our portfolios we have added funds that can manage risk within their portfolio by allocating to cash. This is reflected in our overall beta exposure within the Australian equities component of our portfolios, which has been below 1. The chart below shows the rolling 1 year beta of the Australian equities component of our portfolios relative to the S&P/ASX 300 index.

Chart - Implementing a dynamic approach to portfolio construction

Shareholders burnt by Telstra’s dividend cut and spiralling share price should be wary of high yield shares with attractive dividends but shaky fundamentals. Telstra sparked an exodus of investors after announcing a cut in its dividend from 15.5c per share to 11c, with the challenges facing Australia’s major telco suddenly made palpable to mum and dad investors.

The lesson of Telstra is that investors should not invest purely for income or tax advantages (i.e. franking credits) at the expense of sound fundamentals. Despite being stuck in a downward trend since mid-2015, investors tolerated the stock’s poor performance so long as it maintained its attractive fully franked dividend.

The dividend cliff (TLS dividend $ per share)

*Expected

Source: Lonsec, Bloomberg, Telstra

The problem is that by the time a company is forced to cut its dividend, fundamentals have already deteriorated. In other words, investors waiting for the dividend cut as a signal to bail were already too late. While Telstra has confirmed a semi-annual dividend of 11c, FY19 guidance is vague, stating it will pay a dividend in the range of 70 to 90% of underlying earnings.

Telstra share price and P/E ratio

Source: Lonsec, Bloomberg

Since the end of its final privatisation, Telstra was the darling of mum and dad investors, who saw Telstra as a ‘national champion’ that could provide sustainable income over a long period of time. Telstra’s fundamentals came under threat in the form of competition from the NBN and other players like TPG, diminishing fixed-line revenue, and a crippling bureaucracy.

Telstra’s new strategy, named Telstra2022, splits out the telco’s infrastructure into a separate business and aims at reducing costs and improving customer service. Whether investors consider re-entering Telstra should depend on whether this strategy can improve the telco’s long-term prospects, rather than the success of short-term measures to boost profit and distributions.

Release ends

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2018 Lonsec Research Pty Ltd, ABN 11 151 658 561 AFSL 421 445. All rights reserved. Read our Privacy Policy here.

India has been a high performing component of the emerging market and Asian indices over the past five years, driven by compelling demographics supporting mass scale consumerism, an improving business policy framework, and an underdeveloped infrastructure sector demanding ramped up investment.

Global developed market equities have generally outperformed emerging markets over the April 2008 to April 2018 period, but the more recent one year and three-year returns have favoured Asian, Chinese and Indian equities. Chinese investors have enjoyed a strong year, driven by economic stability and reduced concerns about debt imbalance. Indian equities have had an interesting journey. The chart and table below show the performance returns from various country and regional indices over the last 10 years.

Global indices performance (2008-2018)

Source: MSCI, Lonsec

Indian equities sold off heavily in the GFC then rallied alongside most risk assets through 2009 before enduring a two-year downward trajectory on concerns about economic stability and ‘Fragile Five’ labelling. That is, in a period where global investment sentiment was weak, India was viewed as being overly dependent on foreign capital to finance its economic growth. With capital flows retreating from India, the currency softened and equities weakened. All changed in early 2014 with the election of Modi’s BJP and the pro-business agenda proving a watershed moment in India’s history and kick-starting a four-year rally.

Performance of global equity indices for periods ending 30 April 2018 (% p.a.)

6 months 1 year 3 years 5 years 10 years
MSCI India NR Index AUD 2.48 11.55 9.68 14.95 4.59
MSCI China NR Index AUD 7.02 34.02 6.51 18.38 6.80
MSCI AC Asia Ex Japan NR Index AUD 6.43 22.86 8.53 15.08 7.12
MSCI Emerging Markets NR Index AUD 6.45 20.58 7.56 11.63 4.46
MSCI World Ex Australia NR Index AUD 5.08 12.40 9.24 16.78 7.92
S&P/ASX 200 Index AUD 3.37 5.46 7.53 7.53 5.29

Source: MSCI, Lonsec

India’s deep market

According to the Securities and Exchange Board of India (SEBI) there are 14 stock exchanges approved by SEBI for operation in India. The two major exchanges are the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) with all listed companies in India listed on either the BSE or NSE or both. The NSE was formed by the Government in 1994 and operates the Nifty 50 index (the market cap of the leading 50 companies across various sectors). The BSE is Asia’s oldest stock exchange and was established in 1875.

The market for listed companies in India is deep with over 5,000 companies listed on the BSE and around 2,000 on the NSE. This makes India the largest equity market globally. The MSCI India index in AUD is the standard reference benchmark for Indian equities performance. It holds 79 stocks as at April 2018 and covers approximately 85% of the Indian equity universe. It is skewed towards the largest companies in India (80%) but holds a modest mid cap exposure (20%). The top 10 stocks dominate the benchmark and comprise nearly 50% of the Index and is populated by familiar names such as HDFC, Reliance Industries, Infosys and Tata Consultancy (TCS).

In terms of sectors, the Index is dominated by Financials (24%), Information Technology (16%), Energy (13%), and Consumer Discretionary (12%). The below chart compares the sector composition today with five years ago and shows similar composition with a modest rise in consumer discretionary, health care and material stocks at the expense of a lower financials weight.

MSCI India sector composition 2013 and 2018 (sector average weight)

Source: MSCI, Lonsec

The chart below compares the total return of each sector over the same period. Alongside consumer staples, healthcare stocks were a major driver of performance in 2013. Fast forward to today and healthcare was a drag on performance over the past year with concerns about the global competition forces impacting on India’s leading pharmaceutical stocks like Sun Pharmaceuticals and Dr Reddy’s Laboratories. IT stocks were the biggest contributor to benchmark performance in 2018 with names like TCS and Infosys benefiting from strong global demand for their services.

MSCI India sector performance 2013 and 2018 (sector total return)

Source: MSCI, Lonsec

The below chart compares the sector contribution to total market return by sector over the same periods and shows that information technology companies contributed nearly 40% of the return in 2018 while financials drove the benchmark in 2013 attributable to close to 50% of the benchmark return.

MSCI India sector performance 2013 and 2018 (% contribution to total market return)

Source: MSCI, Lonsec

The Indian equity market has displayed a remarkable degree of dynamism, and Lonsec believes there are long-term opportunities available for investors looking for emerging market exposure. Investors have an array of choice between active and passive investment when considering investing in India. This post forms part of a broader article on access to Indian market exposure and strategies. To read the full article, log on to iRate or contact our client services team.

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2018 Lonsec Research Pty Ltd, ABN 11 151 658 561 AFSL 421 445. All rights reserved. Read our Privacy Policy here.

Australia’s small cap shares have continued their extraordinary run of outperformance, returning 4.1% over the past three months to May, and an incredible 25.4% over the past year. Meanwhile, in a tale of two markets, Australia’s largest shares have proved the laggards, with structural headwinds, regulatory risks, and declining public trust dragging the top of the market down.

Small cap shares have continued to present significant opportunities through 2018, with themes such as technological disruption, Chinese demand, and the commodity rally all driving valuations higher. The beneficiaries have been previously ‘beaten-up’ mining services stalwarts such as Monadelphous (MND) and NRW Holdings (NWH), as well as consumer staple market darlings like organic infant formula producer Bellamy’s (BAL).

Small versus large cap performance over five years to 31 May 2018

Source: Lonsec, Bloomberg

The S&P/ASX 20, which encompasses Australia’s top 20 biggest stocks by market cap, is underperforming the broader market, returning 6.9% over the past year, compared to 9.6% for the ASX 200. In particular, recent poor performance from the banks, as well as problem stocks like Telstra (TLS), Brambles (BXB), and AMP (AMP) have all been a drag. The sheer size of these stocks has had a big impact on the market, with the five worst performing stocks within the top 20 wiping $51.6 billion from the S&P/ASX 200 Index over the past year.

Australia’s biggest losers (% return over year to 31 May 2018)

Source: Lonsec, Bloomberg

In terms of Australia’s major banks, Lonsec currently views valuation support at ‘fair value’, while earnings are likely to exhibit low growth at best, due to weaker consumer sentiment and the increased regulatory risk in the wake of the Royal Commission into Financial Services. However, despite the recent pain, it is possible the worst may be over for now, and investors will be looking for long-term value opportunities among the big four.

Release ends

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

Copyright © 2018 Lonsec Research Pty Ltd, ABN 11 151 658 561 AFSL 421 445. All rights reserved. Read our Privacy Policy here.

Australian fund managers with a value focused investment strategy are struggling to keep up with the index as the market continues its shift in favour of growth stocks.

While value shares have outperformed growth over the past ten years, growth shares have been in front for the past five, despite a value comeback in 2016 and the early part of 2017. Recent performance shows that growth has extended its lead even further, while the average return for value managers is in negative territory so far in 2018 (see chart below).

Calendar year returns for Australian growth and value equity fund managers (% p.a.)

Source: Lonsec

Includes value and growth style Australian equity fund managers rated by Lonsec Research

Value investors look for well-run businesses with solid company fundamentals that may be undervalued due to industry headwinds or temporary negative events. In contrast, growth investors look for businesses with high growth potential or earnings momentum, which can include smaller, scalable businesses or established market leaders.

The behaviour of value and growth shares over different periods, and the tendency for one or the other to outperform, underlines the importance of diversification, not just across markets and sectors, but across investment styles as well. For example, despite the five-year trend, value has outperformed growth significantly over a twenty-year period.

Value versus growth shares (growth of $10,000 to May 2018)

Source: Lonsec, Bloomberg

Despite the relatively lacklustre performance of Australian shares in 2018, growth companies have remained in favour and are currently the main drivers of market returns, among them consumer staples shares like A2 Milk Co (A2M) and Treasury Wine Estates (TWE), as well as some big names like CSL (CSL), Australia’s leading biotechnology business.

Growth shares have dominated through the end of 2017 and the first half of 2018

Source: Lonsec, Bloomberg

Meanwhile, value shares (represented by the MSCI Australia Value Index) have been weighed down by recent poor performance from financials and telecommunication shares, including the major banks which have come under pressure from the Royal Commission into Financial Services. The banks may become attractive propositions from a value perspective, but the question is how long it will take before they regain favour from the broader market.

Release ends

IMPORTANT NOTICE: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL 421 445 (Lonsec).

Please read the following before making any investment decision about any financial product mentioned in this document.

Warnings: Lonsec reserves the right to withdraw this document at any time and assumes no obligation to update this document after the date of publication. Past performance is not a reliable indicator of future performance. Any express or implied recommendation, rating, or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “general advice” (as defined in the Corporations Act (C’th)) and based solely on consideration of data or the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person.

Warnings and Disclosure in relation to particular products: If our general advice relates to the acquisition or possible acquisition or disposal or possible disposal of particular classes of assets or financial product(s), before making any decision the reader should obtain and consider more information, including the Investment Statement or Product Disclosure Statement and, where relevant, refer to Lonsec’s full research report for each financial product, including the disclosure notice. The reader must also consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, hold, redeem or sell any financial product(s), and the reader should seek independent financial advice before investing in any financial product. Lonsec may receive a fee from Fund Manager or Product Issuer (s) for reviewing and rating individual financial product(s), using comprehensive and objective criteria. Lonsec may also receive fees from the Fund Manager or Financial Product Issuer (s) for subscribing to investment research content and services provided by Lonsec.

Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the information.

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Lonsec Investment Solutions was established to help financial advisers start implementing separately managed account (SMA) solutions. Learn how Lonsec leverages its market-leading research to deliver quality SMA model portfolios.

 

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