Expect drawdowns from long/short funds

Investors of the Australian long/short sector will be disappointed with the underperformance of the Australian shares long/short sector if they remain focused on short-term, according to Zenith Investment Partners’ sector review.

Further to that, the “Zenith 2019 Australian Shares Long/Short Sector Report” showed that it might be very difficult for the sector to produce ‘superior investment outcomes’ without periods of short-term relative underperformance.

“While we expect our rated funds will produce highly attractive return over the long term, there will be short periods where they will underperform,” Zenith’s investment analyst, Jacob Smart, said.

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“As such, we emphasise our belief that investors must take a long-term view when investing in actively managed funds.”

For the 12-month period to 31 March 2019, Zenith’s rated funds across the Australian shares long/short returned an average of 5.2 per cent compared to 11. 7 per cent for the S&P/ASX 300 Accumulation Index which represented a significant underperformance of 6.5 per cent.

According to Smart, the underperformance was caused by the large dislocation of company valuations within the Australian share market.

“In 2018, the spread between the cheapest and most expensive stocks reached record highs and, even after the fourth quarter correction last year, remained at elevated levels,” Smart noted.

“The cheaper segment of the market continued to become even cheaper throughout 2018, while at the other end of the market, the sharp rise in early-to-mid 2018 forced several managers to reduce or exit meaningful short exposures.

“As such, losses were absorbed and the fund were not in a position to fully benefit from the subsequent valuation contraction experienced in late 2018.”

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