In the year of the tech-wreck in global equity markets, declining interest rates and a slowing global economy, those fund managers who stuck to investment fundamentals have benefited in Australian equities performance.
Assirt says the big trend in Australian equities – indeed with global equities as well – is the shift towards value managers and away from growth managers who predominantly focus on earnings growth.
“In a volatile year, a single style bias no longer dominates. The stock-picking abilities of the fund managers have come through. The common theme of the winners is risk-control and diversification,” says Assirt associate director Anthony Serhan.
As a consequence of their investment process, the winners were also underweight (relative to the industry) in the technology, media and telecommunication sector that has caused so many fund managers – and their investors – grief over the past year.
JB Were, winners of the Australian equity class, epitomises this shift.
“Our focus is on mis-priced securities,” says head of equities Marc Harrison. “We look for undervalued stocks based on a discounted cash valuation as opposed to looking for low price to earnings stocks. As such, we never got too excited about the hi-tech boom and were not so seriously hit by its subsequent fall.”
In the risk management of the portfolio, J.B. Were also diversified into a lot of small positions in 35-40 stocks. Being focused on stock selection to add value, the manager is a neutral investor with respect to sectors, interest rates etc.
“The overall market direction and other external factors are not that crucial to us,” Harrison says.
In the year to March 31, JB Were’s Australian equity portfolio was 3 per cent up.
The investment approach used by the UBS team, which comes in second, also focuses principally on identifying value in companies, based upon a discounted cash flow (DCF) analysis.
The UBS style is “neutral”, given that with the DCF approach, portfolio holdings at certain stages may result in the portfolio being viewed as “value” or “growth” bias. UBS also prefers to manage risk by taking more, smaller active bets rather than fewer, large active bets in the portfolio. This reduces the volatility and tracking error of the portfolio.
Head of UBS’s Australian equities team, Paul Fioni, says: “the flight into more defensive stocks suits us as it is where we were relatively overweight.”
As popularity with defensive stocks increased, UBS has become underweight in this sector. It is now shifting the emphasis towards carefully selected cyclical stocks.
The investment approach of Merrill Lynch Investment Managers that took it into third position is based around three key variables – management quality, business strength and DCF valuation. The valuation techniques employed by MLIM are rigorous and include both base case analysis and probability weighted milestone scenario valuations.
Mark Himpoo, MLIM senior portfolio manager, says the past year has been a true test of the group’s investment processes. Like UBS and JB Were, MLIM was underweight in the technology, media and telecommunications sector.
“Our process, which focuses on corporate profitability rather than the actual size of profits, struggled to come to terms with some of the valuations. Staying true to our process has meant our stock selection has not changed substantially over the past year,” Himpoo says.
In all, ASSIRT qualified 17 fund managers for the Australian equity class.
JB Were
UBS Asset Management
Merrill Lynch Investment Managers
