Global equities now appear to be better relative value than Australian equities, and provide diversification against significant security and sector-specific risks in the local sector, according to van Eyk research.
The research suggests the discount Australian equities have historically enjoyed over global equities has eroded in recent years, and that the local equity market is now quite concentrated by sector and stock, and hence riskier and less diversified than many investors appreciate.
Commenting on the research, head of fund manager research Jerome Lander said planners should rebalance their clients’ portfolios to reflect strategic and tactical views and should not be overweight in Australian equities purely because of strong historical performance.
“After three years of strong returns and the market reaching all-time highs, it is prudent to be realistic about the long-term achievable performance that one can expect from Australian equities.
“The market has significant security specific and sector specific risk — as four major banks and the resources sector comprise half the Australian Index and have accounted for the majority of index returns.”
Lander added that the Australian market may also be becoming more competitive and efficient as it is well-covered by investment analysts, meaning that only carefully selected Australian equity managers are providing sufficient added value to Australia’s retail investors.
“Picking a manager or product off the street simply is not worth the cost as the ordinary manager may be unable to justify their fees by providing sufficient added value.
“It is crucial to be able to access Australian equity managers and strategies cost-effectively,” Lander said.
Van Eyk’ sector review of Australian large companies’ managers formally assessed 32 fund managers that provide investors with exposure to Australian equities, out of which just 12 managers received a recommended rating.
“Although our recommended managers are adding about 2 per cent per annum at low levels of active risk, investors who are not selective and do not have access to adequate due diligence are likely to be disappointed,” Lander said.
