Best Fund Manager
Market volatility and growing investor interest in passive funds are just bumps on the road to success, writes Susan Hely
Looking back over the past year, investment markets have had a wild ride. The US hit successive record highs, buoying its Australian counterpart to perform solidly, while real estate trusts slumped and fixed interest softened.
For lone investors, selecting the right shares, bonds and asset classes is tricky. There is a smorgasbord of potential investment managers, with hundreds now available in Australia. Three research houses, Morningstar, Lonsec and Zenith, have rated this year’s best fund manager, Perpetual, highly in three categories: Australian shares, small companies and diversified funds. Perpetual is an active manager with an investment process that identifies high-quality value companies. It has a long history as a value investor and spawned some of Australia’s most renowned value fund managers: Peter Morgan, Anton Tagliaferro, John Sevior, Matt Williams and Charlie Lanchester.
Their legacy lives on and 88% of Perpetual’s funds are in the first or second quartile of performance over five years, 100% over seven years and 83% over 10 years. But active investment management using value investing isn’t easy. Most active investment managers are under fire for underperforming their benchmarks and investors are embracing low-cost passive investments such as exchange traded funds.
So what exactly has worked for Perpetual over the past year?
Paul Skamvougeras, head of equities, says Medibank Private, Alumina and Woolworths have been strong performers for the Australian shares funds.
Michael O’Dea, head of multi-asset funds, says the main contributor to returns from active asset allocation over the past 12 months was being overweight to Japanese, European and emerging market equities, where valuations were more attractive.
Market watchers are worried about the US sharemarket’s eight-year bull run. Skamvougeras says the US is trading at a high valuation on most metrics versus history but if Donald Trump’s tax reforms are passed it could drive upgrades of earnings per share.
“Overall we are cautious given the prospect of the Federal Reserve tightening and higher bond yields which will weigh on equity valuations,” he says.
Emerging markets have picked up and O’Dea says the outlook for them remains constructive in the near term. “But there are several risks to monitor closely such as the pace of monetary tightening in the US, the strength of the US dollar, trade protectionism and the slowdown in economic activity in China.”
Flagging consumer confidence is a worrying trend overhanging the Australian sharemarket. “We believe that consumption will remain sluggish in Australia as households are weighed down with historically high debt levels, little wages growth and increasing cost of living,” says Skamvougeras.
As for Australian retail stocks: “Although most consumer discretionary stocks look cheap relative to history and the market, we believe consensus expectations around sales growth is too high and will disappoint. With the impending arrival of Amazon, we are taking a wait-and-see approach.”
Of the consumer discretionary shares listed on the ASX, Perpetual likes Premier Investments for its strong balance sheet and potential to grow earnings from the rollout of Smiggle and Peter Alexander brands. Skamvougeras says Premier is relatively immune to the greater online competition.