Global Active fund managers have delivered excellent returns for investors over the past few years. However, many have done so whilst consistently underperforming their benchmarks says Zenith Investment Partners in their 2014 Global Sector Review launched last week. To help put that in perspective, for the three year period ending 30 September 2014, global equities, as represented by the MSCI World Index in $A, produced an annualised return of 22.1%. Over the same period, the median manager in Zenith’s global equity coverage universe of unhedged funds with at least a three year track record returned 21.2% p.a., underperforming the benchmark by 0.9% p.a. In terms of manager numbers, this represents 22 out of 37 funds, or roughly 59%.The strong absolute returns for the sector over the last three years are put in perspective when compared to returns of 5.1% p.a. over the last 10 years and 9.5% p.a. over the last 30 years.
Zenith Head of Research, Bronwen Moncrieff, believes there are a number of key reasons that explain the relative underperformance. ‘The impact of a quality bias, and the level of emerging markets exposure are probably the two most prevalent themes, across a broad range of investment nuances and styles that we cover in the report’ she said. “From an intuitive standpoint it would appear obvious that higher quality companies would outperform lower quality companies, and that has certainly been the case over the long-term. But this has not been the case in recent years. In fact, lower quality stocks have outperformed higher quality stocks, and this has had a negative impact on managers with a quality bias in their portfolios.”
“The low dispersion market environment has also been an interesting challenge for active managers” Moncrieff said. The difference in returns between the highest performing stocks versus the lowest has been reduced, which has provided fewer investment opportunities for active managers to differentiate their performance from the benchmark”.
The level of emerging markets exposure in a portfolio has also had an impact on portfolio returns. Within Zenith’s global equity peer group, the level of mandated emerging market exposure varies significantly by manager, although is typically within the range of 0% to 30%. Some managers are benchmarked against the MSCI World Index and some are benchmarked against the MSCI All Country World Index (MSCI ACWI) in $A. For the three years ending 30 September 2014, the MSCI ACWI returned 20.8% p.a., versus 22.1% p.a. for the MSCI World Index, or an underperformance of 1.3% p.a. That is, generally speaking, emerging markets exposure has been a drag on performance.
The sector review also identifies other key trends, a look through analysis of sector and regional exposures, details on the new funds Zenith has added to their Approved List, and ratings changes
Summary of the Zenith 2014 International Shares Sector Review
From an initial universe of 207 International Shares products: 17 were rated “Highly Recommended”, 64 “Recommended”, 22 “Approved”, 2 “Redeem” and 102 “Not rated”.
Click here to view the full report, including tables that highlight:
– Additions to Zenith’s Approved List
– Rating changes, and
– Zenith’s full Global Equities Approved List
