The COVID-19 pandemic has seen three-year gains wiped off in just six weeks during the March quarter, with some strategies outperforming others, new research has found.
Morningstar’s quarterly report showed that all strategies experienced losses but active management strategies outperformed value investing, according to Morningstar’s Ross MacMillan and Michael Malseed.
“One persistent debate among investors over the past five years has been around the merit of growth over value investing.”
“Since 2015, value managers have been trounced by growth managers.”
“However, with markets collapsing in the first quarter of 2020, many investors may have assumed it would be time for the value active managers to shine. Looking at the performance to date, this hasn’t been the case,” said Mr MacMillan and Mr Malseed.
Large-cap fund outperformers over the quarter
Morningstar’s report showed that 38 strategies beat the category benchmark in the first quarter of 2020 – of these, eight are classified as growth managers, 21 as blend-style managers, and only three value managers.
The best-performing large-cap strategy over the quarter was Hyperion Australian Growth Companies. Despite the portfolio trading at a materially higher P/E multiple than the broader market, it provided excellent downside protection during the sell-off.
An overweighting to quality names in the healthcare and technology sectors benefited the fund. Meanwhile, the portfolio doesn’t hold any energy stocks and is substantially underweight in economically sensitive financials.
BetaShares Managed Risk Australian Share ETF (AUST) and AB Managed Volatility Equities were also notable outperformers, given that their strategies specifically aim to provide downside protection in volatile markets. In this respect, they delivered true to label. It should be noted.
Small-cap fund outperformers over the quarter
The report also found only 13 active managers outperformed the small-cap benchmark over the first quarter of 2020; however, we note that over the long term, active managers in small caps have, on average, generated significant outperformance.
The best-performing strategy was Hyperion Small Growth Companies, which, like its large-cap counterpart, is overweight quality names in healthcare and technology while being underweight deep cyclicals in energy and materials. WAM Capital Ord (WAM) and The Montgomery Fund both benefited significantly from their high cash holdings over the period. These cash holdings had previously been a drag in the bull market run up into 2020.
While some strategies worked better during the global sell-off, passive and value investors underperformed the most over the quarter.
Large-cap fund underperformers over the quarter
Morningstar’s large-cap coverage universe 50 active and passive strategies underperformed the category benchmark in the first quarter of 2020.
This included only one growth manager, Ausbil Australian Active Equity (6117), 27 blend-style managers and 17 value managers.
The three worst-performing strategies were, not unexpectedly, geared strategies: Perpetual Wholesale Geared Australian (9835), Ausbil Australian Geared Equity (15329), and First Sentier (formerly CFS) Wholesale Geared Share (4715).
These strategies use leverage to gross up equity-market exposure by 50-60 per cent, which amplifies returns on the upside and down.
Small-cap fund underperformers over the quarter
Nineteen active small-cap managers underperformed over the quarter.
But in the volatile small-cap sector, fortunes can reverse very quickly, so the read-through is limited.
Value strategies faced similar headwinds to their large-cap counterparts as the market sought comfort in earnings certainty and sold down deep cyclicals.
Performance was also weaker further down the market-cap spectrum, where limited liquidity experienced even wider price gyrations.
The worst performers in the category were Allan Gray Australian Equity, which suffered from its substantial overweighting to energy stocks; CFS Wholesale Developing Companies, which plays at the very small and micro-cap end segment of the market; Perennial Value Smaller Companies Trust, which holds a number of very small names and is also overweight in consumer cyclical stocks.