International Shares funds with a concentrated approach outperformed their more diversified counterparts for the 12-months ending 30 September 2016 according to Zenith Investment Partners International Shares Sector Review released this week. 70% of concentrated funds (defined as funds which hold less than 75 stocks) outperformed the MSCI World ex-Australia Index in $A, whilst only 55% of funds with greater diversification generated excess returns.
Senior Investment Analyst, Quan Nguyen, said “The generally accepted drawback of concentrated funds is that there will be a higher degree of performance volatility, especially over shorter periods of assessment. However, Zenith has found that this was not necessarily the case. In fact, the volatility of the concentrated funds was marginally lower than that of the more diversified funds over the long-term.”
Zenith believes one of the key attractions of concentrated funds is that they should, in theory, contain only a manager’s best ideas. Typically, portfolio construction will be without regard for the benchmark and therefore these funds will not hold benchmark linked positions purely for risk management purposes.
Nguyen also said that “Whilst on average, concentrated funds have performed better, the difference between the best and worst can be significant. As a result, Zenith continues to advocate the use of concentrated funds as part of a diversified International Shares portfolio rather than as a standalone allocation.”
Zenith’s rated active International Shares funds outperformed the benchmark by 0.82% (net of fees) for the 12-months ending 30 September 2016, despite International Shares producing the lowest annual returns since 2011.
Summary of the Zenith 2016 International Shares Sector Review:
From an initial universe of 175 products:
• 12 were rated “Highly Recommended”
• 69 were rated “Recommended”
• 11 were rated “Approved”
• 4 were rated “Under Review”
• 77 were “Not Rated”
• 2 were placed on “Redeem”
