Hedge Clippings | Friday, 30 July 2021
As we noted last week in Hedge Clippings, the twelve months to 30th of June were extraordinary, with the ASX200 only recording 1 negative month. As we've come to the end of July that record has been extended, and should it continue through September it will make it 12 continuous positive months. Hopefully this doesn't put a jinx on the market's positive run as it heads into reporting season, and it can overcome the effects of current lock down restrictions.
As welcome as these positive numbers are for most investors, they distort the longer term numbers and averages in much the same way as the drawdown of over 25% suffered at the start of the pandemic. Understandably top-performing managers, and their investors, are happy with their returns, but it does make it more difficult to evaluate longer-term performance, not only of individual funds, but also of specific sectors.
AFM's analysis segregates funds in many different ways, such as strategy and geography, but to really compare funds, it can be necessary to drill down to specific "peer groups" to do so - in other words, to compare "apples with apples" and "oranges with oranges". Even this can be easier said than done, particularly in the "Alternatives" sector, which can see a crypto fund placed into the same asset allocation "bucket" as life settlements.
We might leave that debate for another day, except to say one of (in fact the only) common feature between the two is their low (or zero) correlation to traditional asset classes, and therefore capacity to provide welcome diversification when equity markets do, as they eventually will, return to a more normal pattern of returns and volatility.
In the meantime let's look at more traditional investments, and equities in particular, where Peer Group comparisons really come into their own, particularly when looking at fund selection via a sector, rather than an asset allocation lens.
Returns are always on top of most investors' minds, closely followed by risk - generally most easily judged by the Sharpe ratio which measures the degree of risk - as determined by standard deviation or volatility of monthly returns. So while Australian Equity Small to Mid Cap funds in Australia have clearly performed first or second amongst the six Equity Peer Groups over 1, 3 and 5 years, they have done so with a lower Sharpe ratio - and therefore with greater risk - ranking 4th over each time frame.
Averages are of course dangerous, and drilling down into the fund list will show a wide variance between the 79 funds which make up the Australian Equity Small to Mid Cap Peer Group in AFM's database, with returns which over the past year have ranged between +13.5% through to +130%, and over 5 years from +2.57% to +22.71% per annum.
News & Insights
Interview with Collins St Asset Management
Is Greed Feeding the Macro Environment? by Jesse Moors from Spatium Capital
Have Emerging Market Funds Passed Their Used-By Date?: Part I by Premium China Funds Management
Inflation: Raising the Stakes by AIM