Research house Lonsec said the area of greatest innovation and growth within the Australian equity sector over the past 12 months has been absolute return funds.
The Lonsec Australian Equity Sector Review, released today, said disappointment with the performance of more traditional benchmark tracking Australian equity product designs had led to the development of more absolute return and index unaware investment products.
“One of the areas of innovation on the Lonsec Australian equity landscape to develop critical mass in recent times comes as little surprise,” said Duncan Knight, Senior Investment Analyst.
“Industry innovation now sees quality offerings coming to market that offer exposure to the Australian equity market without the limitations of being restricted to benchmark relative active positions.
“While absolute return funds are not formally a sector in-and-of-itself, these products bring an important perspective to the traditional benchmark aware investment designs. However, this space is quickly evolving into heterogeneous compote of designs, philosophies and opportunity sets.”
While innovation in product design is a welcome development, constructing a portfolio using these products can be a problematic. The Lonsec review found that complexity considerations are paramount when considering using products in this space, as some funds have very simple pragmatic designs and some are necessarily labeled hedge funds.
“The lack of homogeneity within the space, with product designs spanning from fully invested benchmark unaware funds, through to funds that are able to vary their exposure to the equity market, makes apples to apples comparisons difficult,” Mr Knight said.
“Based on their differentiation, one could reasonably apply a ‘handle with care’ sticker to these funds. However there are many positive features worth considering,” said Mr Knight.
Absolute return products are not just seeing growth in the Australian equity sector. “You could argue that the Australian equity manufacturers as a whole are laggards in this area,” Mr Knight said.
“The income and multi-asset sectors have long had absolute return style products and have evolved the product offerings significantly in recent times.”
As Lonsec noted in its 2012 Multi-Asset Sector Review: “Investors at or nearing retirement are beginning to look for outcomes based, or real return solutions, rather than peer relative performance.”
In the Australian equity space, until recently, established managers haven’t been as willing to ignore ‘peer risk’. However Lonsec said the product development trend will continue, “particularly if the equity market returns remain volatile and as the concept of ‘not being able to eat relative returns’ gains more traction and resonates not only with manufacturers, but more importantly, investors,” Mr Knight concluded.
Lonsec conducts its Australian Equity Sector Review across all Australian equity sub asset classes during the same review cycle. By aggregating the sub asset class reviews into one broad program of assessment Lonsec can enhance the guidance and insight it provides.