Australian fund managers using a growth style strategy continue to show their wares in the first quarter of 2020, faring better than their value investing counterparts across Australian equity funds, falling only slightly less than the benchmark.
Value better in a down market?
The COVID-19-induced share market volatility over the first quarter led investors to assume that value strategies would come out on top. However, Morningstar says, “looking at the performance to date, this hasn’t been the case. Growth managers have extended their outperformance while the value style has continued to suffer.”
Growth-style investors select stocks that have the potential to outperform the overall market over time. They are prepared to pay a premium for stocks that they expect to produce high rates of return.
Whereas value-style investors select stocks that are currently trading below the actual value of the company, expecting they will provide a superior return.
“The lower-for-longer interest-rate environment plays right into the hands of growth managers who rely on low discount rates to justify historically high stock valuations,” says Morningstar.
The category benchmark for large-cap Australian equity funds, the S&P/ASX 200 Accumulation Index, declined by 23% in the first quarter of 2020. The small-cap benchmark, the S&P/ASX Small Ordinaries Accumulation Index, dropped 26.7%.
“Both benchmarks erased all the gains made over the past three years, assuming the full reinvestment of dividends,” Morningstar says.
The Australia fund equity large value category underperformed its benchmark by 2.9%, while the mid/small value category underperformed by 1.4% with growth strategies coming out on top for both.
“The decade-long bull market has left limited value in the market outside of deep cyclicals, capital-intensive industrials, and leveraged financials,” says Morningstar.
“This has resulted in many value managers having portfolios skewed to themes such as energy, materials, and banks. These sectors have been among the hardest hit during the COVID-19 sell-off, as they are likely to bear the brunt of an economic downturn,” adds the research house.
The large-cap strategy that produced the best return over the quarter was Hyperion Australian Growth Companies, at -11.34%.
“Despite the portfolio trading at a materially higher price/earnings (P/E) multiple than the broader market, it provided excellent downside protection during the sell-off,” says Morningstar.
The Hyperion fund has a large weighting of quality names in healthcare and technology sectors, does not hold any energy stocks and is underweight in economically sensitive financials.
Other outperformers include BetaShares Managed Risk Australian Share ETF (ASX: AUST) (-12.77%) and AB Managed Volatility Equities (-13.71%), as their strategies specifically aim to provide downside protection in volatile markets.
The geared funds emerged as the worst performers in the large-cap category. The worst-performing funds were Perpetual Wholesale Geared Australian (-56.94 %), Ausbil Australian Geared Equity (-52.42%) and First Sentier Wholesale Geared Share (-41.54%).
Some of the worst performers were value-orientated strategies including Nikko AM Australian Share Concentrated (-31.11 %), Nikko AM Australian Share (-31.04%) and Yarra Australian Equities Fund (-30.47%).
Morningstar says Nikko AM strategies have large weightings to the industries that have been impacted by the pandemic: financial services, energy and mining.
Yarra has a large exposure to the domestic banking sector, with CBA, ANZ and Westpac, as well as toll-road stock Transurban.
Out of the small-cap category, the best performer was the Hyperion Small Growth Companies, returning -15.68% over the quarter.
Morningstar says that like the Hyperion Australian Growth Companies, the small-cap option is “overweight quality names in healthcare and technology while being underweight deep cyclicals in energy and materials.”
Value strategies faced similar headwinds to their large-cap counterparts as the market sought comfort in earnings certainty and sold down deep cyclicals, says Morningstar.
The three worst performers in this category were Perennial Value Smaller Companies Trust (-38.5%), CFS Wholesale Developing Companies (33.65%) and Allan Gray Australian Equity (-33.50%).
The Perennial fund suffered because it holds a number of very small names and is also overweight in consumer cyclical stocks. CFS held stocks from the very small and micro-cap end segments of the market and Allan Grey had substantial overweighting to energy stocks.
“Performance was also weaker further down the market-cap spectrum, where limited liquidity experienced even wider price gyrations,” says Morningstar.
