Aussie small/mid-cap equities stay on top
Overall, almost half the sector’s funds (46.67 per cent) were ranked in the top two Crown ratings, significantly higher than the average across all funds of 20 per cent.
Under the FE Crown Rating system, the top ten per cent of rated funds in each sub-asset class receive five Crowns, the next 15 per cent get four, and the remaining 75 per cent is equality split between three, two and one Crown ratings.
The next best performing sectors were Asia Pacific single country equities, which had a huge 57.14 per cent of funds receive four crowns, and Asia Pacific ex Japan equities, which almost doubled the average for five crown funds with 17.65 per cent.
Gary Monaghan, an investment director in Fidelity’s Asian equities team, said that the Asian markets leant themselves to greater stockpicking opportunities. As there is less passive money in Asia, there are more stock options.
They have also performed very strongly, with the Asia Pacific region generally outperforming other indices since February 2016.
While sentiment prior to that time had largely been “ultra-negative” toward the region, according to Monaghan, that has changed as investing in the region looked cheap and fundamentals seemed robust over the last couple of years.
China and India, for example, have both introduced and are planning economic and general policy initiatives that would solidify the worth of fundamentals in the region.
Monaghan said that India’s de-monetisation movement in November 2016 was an example of this. The Government’s policy brought waves of people into the banking system, increasing confidence in Indian investment opportunities.
Fidelity’s China, India and Asia funds are some of the biggest in the Asia Pacific ex Japan and Asia Pacific single country equities sectors.
Fixed interest sectors invested in diversified credit and global strategic bonds also performed well, with 71.05 and 42.86 per cent of funds in these sectors respectively earning ratings in the top two Crown categories.
AMP chief economist and head of investment strategy, Shane Oliver, said that he expected that part of the explanation as to why these sectors performed so well related to the markets.
“Asian shares, Australian small and mid-caps and global credit have had relatively strong performances in terms of returns in recent years,” he said.
“This likely has made it easier for funds in those sectors to achieve high ratings.”
The fixed interest – Australia/global bond sector was the worst performing sector, with a whopping 94.44 per cent of funds invested in it receiving just one or two Crowns.
No funds within the sector received the top two Crown ratings, with just 5.56 per cent earning three.
Oliver said that this could be due to low yield range bound trading constraining returns for Australian and global sovereign bonds, which could perhaps have made it harder for managed funds invested in these assets to perform.
The global property, mixed asset – moderate and global small/mid-cap equities sectors were the next worse performers. They each had over 70 per cent of funds receive either one or two Crowns, significantly above the average of 50 per cent.
These sectors did not compensate their poor performances with corresponding over-representation in highly-rated funds, either.
The global property sector just fell below the average for four and five-rated funds with 21.43 per cent. Both global small/mid cap equities and mixed asset – moderates significantly underperformed with just 7.14 and 12.73 per cent of funds ranking in the top two categories respectively.
According to Oliver, the poor performance of global property reflected the fact that listed global property has had various scares associated with raising bond yields over the last three years, which have constrained returns, making it harder for many managers.
Finally, the Alternative sector was over-represented in both the highest and lowest ratings. It had the most five Crown-rated funds of any sector at 53.73 per cent, while also having more than double the average for one-Crowns at 20.90 per cent.
The diverse range of benchmarks against which funds in the sector are compared makes determining their Crowns difficult, as the Ratings consider outperformance against a reliable benchmark.
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