Lonsec’s review of the Australian Equity Concentrated sector encompassed 14 funds that were formally researched and rated, and a number of other prospect funds.
Lin Ngin, Senior Investment Analyst responsible for this review commented, “Lonsec has seen a number of new entrants to the concentrated sector over the past few years and some of the funds we reviewed for the first time this year, but did not rate, may be reconsidered in the next review cycle.”
Two funds attained Lonsec’s highest rating, Highly Recommended – the Hyperion Australian Growth Companies Fund and Tyndall Australian Share Wholesale Portfolio.
The more the merrier
Lonsec believes one of the reasons for the increased number of managers offering a concentrated strategy is due to the rise of the core/satellite approach, with clients preferring more active investment strategies to be used as satellite funds.
“Another reason for the growth in new concentrated strategies has been the continuing drive of SMAs, with providers enticing clients with transparent and more tax-effective solutions,” commented Ngin.
“More concentrated strategies (typically holding 15-35 stocks) are generally better suited for SMAs, as well diversified portfolios are not as economically viable for smaller investors and are better suited to a unit trust product that the SMA form.”
Most concentrated managers are running strategies that employ a similar style, philosophy and process to their traditional core offering, with the key difference being in the portfolio construction process.
“Typically this difference is the manager constructing a ‘best ideas’ portfolio, one that includes only those stocks the manager believes have the highest likelihood of outperforming.” said Ngin.
Retail flows are just a trickle
The majority of managers in this sector have struggled to significantly grow FUM over the last year, which is consistent with what Lonsec has observed across other sectors.
“It’s generally considered that there’s still a lot of nervous money on the sidelines or parked in term deposits,” said Ngin.
“ETFs have also played a role in attracting FUM away from other investment products, with investors looking more favourably at low cost portfolio options.”
