Active extension funds thrive in current market environment

Over the last 12-months the Australian long/short sector generated solid returns consistent with the strong absolute performance of the Australian equities market.

For the 12-months ending 31 May 2014, the average return for Zenith rated active extension long/short managers was 20.1% compared to 16.1% for the S&P/ASX 300 Accum. Index. Over the same period, the average return for Zenith rated variable beta long/short managers was 14.8%. Given the average net exposure of the rated variable beta long/short managers was 67% over this period, below benchmark absolute performance for the variable beta long/short manager universe was not surprising.

According to Rodney Sebire, Senior Investment Analyst at Zenith Investment Partners, “While the headline performance of the equities market was strong, and all sectors within the index delivered positive returns, performance across GICS sectors was certainly variable. Opportunities for generating alpha on the short side were therefore very much tilted towards successfully identifying companies experiencing stock specific challenges. Events such as companies narrowly missing profit guidance, or companies experiencing falling prices and margin erosion across key product lines, for example.”

As part of the sector review, Zenith has undertaken a detailed analysis to compare the performance of Australian equity long/short funds with their long-only flagship equivalents to quantify if long/short investors are being compensated for the additional risks assumed. According to Sebire, “Australian equity long/short funds have delivered higher returns on a net of fees basis, with slightly higher volatility (as measured by Standard Deviation) compared to their long-only equivalents. Interestingly, the level of excess returns generated as a proportion of active share has been less for long/short funds. Reasons for this outcome are one of either: managers having less skill in identifying short stocks; or the market environment being less conducive for generating alpha on the short side. Given the market environment over the last 12-months, in Zenith’s opinion, the latter is the more likely scenario.”

From an initial universe of 26 Australian equity long/short products, 14 were assigned a positive rating: 4 were rated “Highly Recommended”, 7 were rated “Recommended” and 3 were rated “Approved”.

Click the following link for the full report, including tables: Zenith Media Release Zenith 2014 Australian Shares Long Short Sector Review (July 2014)