Aussie equities on the up-and-up
By Tim Hewson
25 September 2009
In the hope of reigniting portfolio performance, investors are flocking back to growth assets, such as Australian equities, and dumping defensives, such as cash, term deposits and fixed income, as they seek to recover losses from the past two years.
This change of heart has been fuelled by the recent share market upswing and positive economic news.
From the February trough to the end of August, the broader All Ordinaries Index returned 36 per cent, recovering 70 per cent of the losses generated during the previous nine months.
Recent findings from the IFSA/Core Data Investor Sentiment Index for the third quarter of this year also indicates that investor sentiment has shifted from a decidedly negative stance (-22.3 in Q1 2009 to a marginally positive +5 in Q3 2009) for the first time since the Global Financial Crisis began.
According to the survey, the two favoured investments are shares and managed funds; 62 per cent of respondents believe that equities will perform better in the next three months with 54 per cent saying the same for managed funds.
Supporting these findings is recent Plan for Life data which shows a noticeable 27 per cent increase in inflows to Australian equity managed funds since January 2009.
Getting back in the saddle
If you are considering a re-entry into the market, and switching out of some cash, it's important to remember that fund selection and style can have a significant impact upon the performance of your portfolio.
For example, looking at the Australian equity funds offered via RaboPlus, the difference between the best and worst performing funds over the past three years was more than 22 per cent with the Challenger Small Companies Fund returning 8.39 per cent pa, and the Perpetual WFI Geared Australian Shared Fund down to -13.88 per cent.
As the time horizon increases, the difference between the best and worst performers decreases. Over the past five years, the difference was a slightly more modest 7.98 per cent and only 5.98 per cent over the past ten years.
So how have they stacked up?
Large Cap Funds
These funds represent the majority of equity funds, and hold stocks with market capitalisation values greater than $2 billion. These stocks are considered to be 'safer' and less volatile than small cap stocks and fund managers typically benchmark their performance against the S&P/ASX200, S&P/ASX300 or the All Ordinaries indexes.
Large Cap - Growth
Large cap growth funds offer the best opportunity for capital appreciation. Growth managers generally focus on market momentum when trading and seek out stocks that provide the best capital growth opportunities and generally do better in rising markets.
Source: Morningstar Research. Effective 31 August 2009.
Large Cap - Value
Value managers typically select often undervalued stocks with fundamentally strong balance sheets. These managers tend to trade less and take longer-term investment positions than growth managers. Value managers tend to perform better than growth managers during downward trends, or more volatile market cycles.
Source: Morningstar Research. Effective 31 August 2009.
Large Cap - Blended
Blended funds run dual strategies which enable them to better weather market volatility.
In fact, of all Australian equity funds offered by RaboPlus, a large cap blended strategy has been the best performer over one, two, five, seven and ten years.
The below table illustrates the importance of choosing the right fund, and the impact on performance, even over a short timeframe.
Source: Morningstar Research. Effective 31 August 2009.
There is a 27.4 per cent, 18.75 per cent and 15.58 per cent difference between the best and worst performing funds over the past one, three and five years respectively.
Small Caps
Smaller companies of less than $2 billion market capitalisation offer investors the chance to invest in growing businesses.
Most Small Cap funds tend to be less diversified, and make heavier bets on fewer stocks, compared with large cap managers.
The table below shows the difference in returns between the small cap blended and growth funds.
Source: Morningstar Research. Effective 31 August 2009.
Important note: Before making any financial or strategic decision you should obtain professional advice which takes into account your personal circumstances and objectives. This article is not professional advice and does not take into account your personal circumstances or objectives.
The views and opinions expressed in this article do not necessarily represent the views and opinions of Rabobank Australia Limited. The persons involved in its preparation and distribution and their related persons disclaim all liability for any loss or damage suffered due to the use or otherwise of the information.
