Australian fund managers saw three years of gains evaporate in just six weeks during the March quarter, but the greatest pain was reserved for value strategies, which fared worse than the index as COVID-19 erupted.
Overall, the benchmark S&P/ASX 200 dropped 23.1 per cent on a total return basis during the first three months of the year.
Morningstar’s quarterly report on Australian equity managers calculated that value managers investing in large companies dropped 26 per cent, large cap blended managers (which mix growth and value strategies) fell 23.7 per cent and large cap growth managers chalked up a 22.6 per cent decline.
Small cap managers struggled more than large cap managers: blended styles fell 28.4 per cent, value 28.1 per cent and growth 26.4 per cent. The S&P/ASX Small Ordinaries Index fell 26.7 per cent on a total return basis over the quarter.
“Both benchmarks erased all the gains made over the past three years, assuming the full reinvestment of dividends,” Morningstar’s Ross MacMillan and Michael Malseed said in new research on Thursday.
Investors had hoped at the start of the year for a repeat of 2019’s outstanding gains, but they were crushed mid-way through the quarter when the index, after rallying to a record high in February, fell precipitously for its fastest downturn since the 1987 crash.
The selling stemmed from panic that the spread of COVID-19 outside China would cripple the global economy.
“What was initially thought by investors to be a basic supply side event, and limited mostly to Chinese manufacturing output, swiftly evolved into a massive global demand shock as household and corporate expenditure ground to a halt through enforced lockdowns,” the analysts wrote.
Of the large cap individual funds reviewed by Morningstar for the quarter, eight growth managers, 21 blended managers and three value managers outperformed the benchmark. But in the same category, there were 50 large cap underperformers.
With value strategies dropping the most in terms of returns for the large cap managers, Morningstar singled out the Nikko AM Australian Share Concentrated Fund, down 31.1 per cent, Nikko AM Australian Share Fund, down 31 per cent, and Yarra Australian Equities Fund, down 30.5 per cent, on a total return basis for the quarter.
These funds tended to be invested in banks, oil and gas, resources and infrastructure stocks, which damaged performance.
“The Nikko AM strategies traditionally have large weightings to the financial services, energy, and mining sectors, which were all negatively impacted by the faltering economic conditions, oil price collapse, and lower demand from China,” Morningstar said.
“Yarra maintains a high-conviction portfolio, with an unwaveringly large exposure to the economically exposed domestic banking sector, specifically Commonwealth Bank, Westpac, and ANZ. Yarra also held large positions in infrastructure toll-road stocks Transurban and Atlas Arteria, which are being severely impacted by COVID-19 lockdowns.”
Broadly, Morningstar said the returns for value managers fuel the wider debate about growth versus value that has been raging since 2015. Value has underperformed since.
“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,” they said. But the decade-long bull market appears to have “left limited value in the market outside of deep cyclicals, capital intensive industrials, and leveraged financials”.
“With markets collapsing in the first quarter, many investors may have assumed it would be time for the value active managers to shine.”Morningstar
“This has resulted in many value managers having portfolios skewed to themes such as energy, materials, and banks. These sectors have been among the hardest hit during the COVID-19 sell-off, as they are likely to bear the brunt of an economic downturn.”
The pandemic has been met with massive policy measures, including Australian interest rates slashed to 0.25 per cent.
“The lower-for-longer interest-rate environment plays right into the hands of growth managers who rely on low discount rates to justify historically high stock valuations,” the analysts said.
The best performing large cap strategy over the quarter was the Hyperion Australian Growth Companies Fund, which fell 11.4 per cent on a total return basis. An overweight to quality healthcare and technology companies, lack of exposure to energy and a substantial underweight to financials helped it to outperform, Morningstar said.