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Printed: 20 April 2024 4:08 PM

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24 Feb 2024 - Hedge Clippings | 23 February 2024

By: FundMonitors.com

    

Hedge Clippings | 23 February 2024

This week for a change, Hedge Clippings is going to ignore the Reserve Bank, inflation, interest rates, and even politics, as Barnaby's retired to the bush, and Donald Trump has seemingly even gone quiet as he considers his next legal option. Instead, we're reverting to our bread and butter, the performance of markets and managed funds.

It's been just over 3 months since the extraordinary rally in equities kicked off last November. At the end of October last year, the ASX200 Absolute Return Index (ARI) was negative (just) YTD since January 2023, and up only 2.95% over 12 months. By the end of December, the index was up 12.4%. Things did slow down somewhat in January, with a return of 1.19%, by which time the 12 month rolling return had fallen to 7.08% thanks to its performance in January 2023 "falling off" the 12 month's numbers.

In the small cap sector, the numbers were even more extreme as risk appetite among investors, plus limited liquidity in most stocks in the sector took a toll. At the end of October '23, the ASX Small Ordinaries ARI was down 6.05% YTD, and -5.11% over 12 months. By the end of December, it had risen over 14% to finish the year up 7.82%, before dipping to a 12 month number of +2.09% by the end of January. Small caps of course are notoriously volatile: In September 2022 the index was down 22% over 12 months, but a year earlier, September 2021, the index was up 30.4%, having risen no less than 52% in the 12 months to March '21 in an amazing rebound from the initial depths of COVID in March 2020 of -21% over 12 months.

Experienced investors and advisors will correctly point out that when investing in the market, and managed funds in particular, it's the long (term) game that counts. Most offer documents (and ASIC) suggest a 5-7 year term to ride out the swings and roundabouts. Taking that approach, and the long term suggests an 8-9% annualised return (including dividends) from the Australian equity market and 10-12% from global equities based on the MSCI All Countries World Index. Over the same 5-7 year period, managed funds in AFM's Equity Peer Groups - both Large and Small/Mid Cap - have on average largely provided the same returns after fees as the index:

The issue of course is volatility, or standard deviation of returns, but as shown below, so is the concept of average. Many will correctly point to the fact that individual stocks and fund's performance varies dramatically and with careful selection, performance can far exceed the above (although passive investing in an index ETF doesn't provide this, but that's a discussion for another day).

Of course equities aren't the only game in town, particularly in volatile markets. Over the past 2-3 years, Private & Hybrid Credit funds have proven that they can return the same as equities (8-10% plus) with a fraction (or none) of the volatility, plus a regular income stream paid monthly or quarterly. We're currently preparing our Fixed Income Private Credit Sector Review to shine a light on this emerging, and increasingly popular sector which features a surprisingly diverse range of strategies and underlying assets.


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