According to Mercer’s Investment Sector Survey released today, in the 12 months to 30 June 2017, the median Australian shares manager outperformed the index by 0.7% and outperformed over the quarter by 0.9%. Over the longer term periods of three and five years to June, the median manager has outpaced the ASX 300 Accumulation Index by 1.2% and 1.6% respectively.
Clare Armstrong, a Principal in Mercer’s Manager Research group said, “We have seen time and time again that the benefits of active management are most evident in more challenging markets and the grinding out of excess returns by the universe of active managers, especially in the last six months to June provided plenty of evidence that this remains the case. Although the full year to June still belongs to active managers who maintained their exposure to resource names, these were often strategies with a value investment style, the rotation back to high conviction growth strategies over the last six months has meant that the table of best performing strategies is populated by strategies with very different approaches to stock picking.
“Regardless of their investment style, the common feature of stronger performing portfolios was that they were high conviction stock pickers, not only showing leadership in falling months but well positioned in the rising markets too” she observed. “Two thirds of the active long only strategies did better this financial year than investors who chose to invest passively, the best performing strategy was one which also shorted stocks, Macquarie’s Australia Plus returned 37.4% but its long only offering, High Conviction fund was not far behind, returning 25.8% for its investors.
“As a group those strategies with the latitude to take short positions did even better than their long only peers but not all risks were rewarded, with the weakest performer for the year, Regal Australian Long short fund earning a full year return of 1%,” said Armstrong.
Overview
After two years of volatile equity markets, the 2016/17 Financial Year provided a strong rebound in returns. Markets entered the financial year recovering from the shock of Brexit, and continued their climb despite the uncertainty caused by the election of Donald Trump. A gradually strengthening global economy boosted profits growth, and equity markets shrugged off the impact of three interest rate rises by the Federal Reserve.
Australian shares lagged somewhat particularly in the second half as the domestic economy struggled, and interest rate sensitive sectors such as REITs also had weaker returns. Bond yields rose significantly following Trump’s election, fearing a deficit blowout, although the slow implementation of Trump’s election promises limited bond losses.
Valuation of asset classes remains elevated, with prospective reduction in monetary stimulus continuing into 2018, suggesting the return outlook remains modest.
Australian Shares
The 2016/17 Financial Year saw equities buck the downward trend of recent years to return to double digit growth. The Australian equity market as measured by the S&P/ASX 300 Accumulation Index gained 13.8%, up from a modest 0.9% recorded over the previous financial year. While the index weakened by 1.6% over the June quarter, the first three quarters of the financial year saw consecutive gains of around 5%.
Returns were positive across the market cap spectrum. An overweight in mid cap stocks will have aided managers’ performance as the S&P/ASX Mid 50 accumulation index posted +18.4%, a return of 4.6% above the S&P/ASX 300 index. A significant recovery in Large cap stocks has seen them outperform their small cap counterparts by 7.1% with the S&P/ASX 50 accumulation index posting 14.1% (compared to -2.6% over the previous financial year).
A resurgence in Materials (+24.5%) and Financials (+18.1%) saw them as two of the best performing sectors over the financial year. With the exception of Telecoms (-21.2%), and Real Estate (-3.5%) performance was largely positive across the sectors
Two financial institutions featured in the top 3 positive stock contributors over the year as Commonwealth Bank and ANZ returned 17.4% and 26.2% respectively while BHP Billiton (Materials) posted a positive 28.9%
In terms of the largest Negative Contributors, Telecoms companies Telstra (-17.6%) and Vocus (-58.7) exhibited weakened returns over the year while in other sectors, Westfield (-21.8%) and Brambles (-19.4%) also declined over the year.
Mercer Australian Shares Surveys
The latest release of Mercer’s sector survey data* reveals that the median Australian shares manager outperformed the index over the 2016/17 Financial Year by 0.7% and outperformed over the quarter by 0.9%. Over the longer term periods of three and five years to June, the median manager has outpaced the same ASX 300 Index by 1.2% and 1.6% respectively.
Over the financial year, managers in the upper quartile of the peer universe achieved excess returns of 3.4%. Over the same period, Enhanced Index and Long Short strategies led performance recording excess returns of 2.0%. Long Short managers outperformed their Long Only counterparts by 0.8% over the financial year and were highest performers over a five year period with excess returns of 3.3%. Income Orientated Strategies were the best performers over three years posting excess returns of 3.6%.
Overseas Shares
The 2016/17 financial year saw global equity markets return to double-digit growth posting 14.7% on an unhedged basis as measured by the MSCI World ex Australia NDR index. The index returned 20.5% in hedged terms over the year.
From a style perspective, Growth stocks (+16.3%) stocks outpaced their Value counterparts (+15.1%) in A$ terms as measured by the S&P Developed ex-Australia Large & Mid cap indices. Small Caps (17.4%) outperformed Large Caps (14.7%) as measured by their respective MSCI World NDR indices in A$ terms.
The MSCI Emerging Markets index returned 20.1% rebounding from the -9.2% posted the previous financial year.
The strongest sector contributions over the year were from Financials (+31.1%) and IT (+29.4%) While returns were mostly positive across the sectors, exceptions were Energy (-4.5%) and Telecoms (-6.6%)
Mercer Overseas Shares Surveys
Mercer sector survey data for June** reveals that the median Overseas shares manager outperformed by 2.0% over the financial year. The median manager also outperformed of longer term periods of three and five years by 0.9% and 0.8% respectively. The spread between upper and lower quartile excess returns was 5.6% with upper quartile managers outpacing the index by 4.8%
Long Only strategies were the strongest performers over the year with excess returns of 2.6%. Over the longer term, Targeted Volatility style managers were the best performers over three years with excess returns of 1.9% while over five years, Long Short strategies led the other sub universes with outperformance of 2.5%.
For further information, please contact us on (03) 9623 5573 or mercer.surveys@mercer.com
