The heads of two of Australia’s leading investment research houses have signalled a return to relevance for active investment managers.
Stephen van Eyk of van Eyk Research and Morningstar’s Anthony Serhan agree that active management in a volatile market has the potential to deliver better returns after fees than index funds.
The two researchers both presented at the Self-Managed Super Fund Professionals’ Association of Australia national conference in Adelaide last week.
Van Eyk warned investors against indexing in the current environment, saying active managers will be able to take advantage of the share market volatility that will be present in the coming years to increase returns. Van Eyk said good active managers would add value, “and that could be as much as the returns you’re making”.
Van Eyk said as a result, his research house has reverted from a core of index funds with active satellites to a core of active managers with index satellites.
Serhan agreed that active managers might have a better chance of adding value in the current conditions. Serhan said in what was “a complete turnaround from 2007”, more active managers are now beating the index after fees.
During his presentation, van Eyk said investment returns are unlikely to return to the levels seen in previous years, as there were unique factors that led to that level of growth.
Van Eyk examined the historical returns in periods following major market dislocations, and found that the chance of investors receiving zero returns over the next two years are almost double than usual.
Based on historical returns, van Eyk also found that after periods of such negative share market movements, there is a 75 per cent chance of getting returns under 10 per cent the following years. He said the chances of returns of negative 10 per cent were also increased, while getting returns of above 15 per cent were negligible.
Van Eyk said based on the historical assessment, the “chances of strong returns over the next two years are dramatically reduced”. Van Eyk said investors would be more likely to receive “moderate returns” of between minus 10 and 10 per cent, with an average around 6 per cent, in markets that would remain extremely volatile.
He said there was the possibility of gains in the coming months, possibly as high as 20 per cent, but that these would be followed by negative returns.
The researcher believes that years three to 10 after the crash will be more likely to have the potential for increasing returns. Therefore, he said investors should take opportunities where they can, “but don’t be in a hurry to be overweight the stock market over the next two years”.
Serhan told the conference audience that investors and advisers must read the research reports put out by the research houses, as securities recommended by the research houses will not suit all clients. He warned that “good securities can make bad portfolios”, using the example of portfolios that have fund manager diversification, but not investment style diversification. Serhan also encouraged dialogue between research houses and advisers or their research committees to achieve the best result from investment research.
