Hedge Clippings | Friday, 14 January 2022
Welcome back to 2020. Towards the end of 2021 we were somehow under the mistaken impression that we were moving onwards and upwards from 2 years dominated by COVID, but in spite of (or maybe partly as a result of) certain politicians' enthusiasm and or naivety, we seem to be deeper in "it" than ever. Maybe it's just a stage we had to go through to get to the end - which seems to be as far, or further away than ever.
Traditionally at the start of each year we cover a blend of looking forward and looking back. Looking forward and markets can no longer ignore the threat of inflation, simply because it is real - and in the US at 6.8% is at its highest level since 1982. Importantly PPI has kicked higher as well which in due course will flow through to consumer prices and inflation. Jerome Powell is at pains to try to downplay the effect on interest rates, but the market may not be so sure.
One interesting aspect of the market's rise has been the dominance of - and potentially distortion by - the performance of major stocks on the underlying market index. While the Dow Jones is equally weighted across 30 companies, the S&P500, Nasdaq, and the ASX100 are weighted by the market cap of each of the underlying stocks. As a result, just 10 stocks in the S&P500 (dominated by the likes of Apple and Google) make up 1/3rd of the total market cap of the index.
In Australia, the top 10 stocks - dominated by the big miners, banks, and a few others - make up 50% of the ASX100. So indices only provide averages, and as we've always reminded ourselves and others, averages can be misleading. A 1% gain in the top 10 is equal to a 1% gain in the remaining 90 - or can cancel each other out.
The risk is that the trend of the underlying 2/3rds (in the case of the S&P500) or 90% of the ASX100 can be masked by the majors. This puts investors in ETF's at risk if the index is masking an underlying negative trend. It also makes an argument for ACTIVE managed funds and, if it comes to that, active ETF's.
Looking at the average performance of managed funds can have similarities, although we don't market weight funds' performances, otherwise, the well publicised recent performance of Magellan's funds (around $90 billion FUM) would overshadow all others. As the table below shows, manager selection is just as important as sector selection, or in the case of stocks, company selection.
What the returns in the table does show is that on average, over all time frames, actively managed funds tend to outperform the underlying index, and therefore index based ETFs or passive funds. But more importantly, careful selection of the best funds leads to significant outperformance - as shown by the average return of the Top 10 funds in each category or peer group, but particularly in the two "hot" sectors in 2021, namely Global Equity Large Cap, Australian Small/Mid Cap, and Australian Equity Alternatives.
Given equity markets as a whole have been performing strongly, doubling that by investing in the top 10 actively managed fund makes good research well worth the effort!
Our two manager interviews to start the year also emphasise the benefits of index unaware and unconstrained investment strategies. Both Collins St. Asset Management and Glenmore Asset Management are "stock pickers" first and foremost and invest in companies that they believe are well managed, undervalued, and have a strong runway for growth - irrespective of the sector.
That's it for the first week back! Stay safe, and best wishes for 2022 - whatever it may bring.
News & Insights
Manager Insights Video | Collins St Asset Management
Manager Insights Video | Glenmore Asset Management
Insync Strategy - Megatrends | Insync Funds Management
10k Words - December Edition | Equitable Investors
Fixed-income Alternative - Life Settlements (part 2) | Laureola Advisors