Australian Long/Short equity funds lag in bull market but deliver better risk/return according to Zenith
Chris Huang
Christopher Huang, Investment Analyst at Zenith says “It is commonly held that long/short funds are as, or less risky than the market. While we certainly believe that quality long/short funds improve an investor’s risk/return profile relative to investing in the index, we do caution investors to understand and be comfortable with the notion of both net and gross exposure. We caution that market risk (net exposure) is not the only risk that investors should be cognisant of. Gross exposure (i.e. exposure to the manager’s stock picking skills) is also of paramount importance.” In Zenith’s 2013 Australian Long/Short Sector Report, we discuss the notion of whether long/short funds are more or less risky than the market.
“Active extension and variable beta funds have had solid returns in generally favourable equity market conditions over the past 12 months. Many of the funds we have reviewed in this sector have kept pace with the Australian equity market in the year to March 2013, with active extension funds benefiting more from the equity market rally than variable beta funds.”
“Many of the active extension funds we have reviewed have maintained close to 100% net market exposures which have allowed them to achieve returns close to that of the Australian equity market. In comparison, variable beta funds have generally struggled to outperform the market as their net exposures have been relatively low. Despite this, we continue to highly rate these type of funds as they have demonstrated a good track record of preserving capital in poorer market conditions.”
Huang also added, “We are also seeing an increasing number of funds taking advantage from shorting mining, mining services and energy related stocks which have performed poorly. This has aided in generating alpha. In this market environment, we believe that there are benefits of including both active extension and variable beta Australian long/short equity funds in an investor’s portfolio, as it allows investors in these funds to benefit from selecting companies likely to rise and fall in value (long and short positions respectively).”
Zenith’s approved Australian long/short equity funds (equally weighted), including active extension and variable beta funds, returned 16.3% relative to the market (S&P/ASX 300 Accumulation Index) return of 19.2% in the year to March 2013. Broken down by investment style, active extension funds returned 19%, which performed better than variable beta funds which delivered 12%. While returns achieved by the Zenith approved Australian long/short equity funds (equally weighted) were lower than the market, these funds achieved it with less risk, as measured by Standard Deviation (9.3% p.a. vs. 11.6% p.a. for the market) in the year to March 2013. By investment style, Standard Deviation for active extension funds for the year to March 2013 was 11.7% p.a. and 6.1% p.a. for variable beta funds over the same period.
From an initial universe of 35 Australian long/short equity products, 6 funds were rated “Highly Recommended”, 9 funds were rated “Recommended”, no funds were rated “Approved” and 20 funds were “Not Approved”.
Zenith’s complete Recommended List for the Australian Long/Short Equity Sector, broken out by investment style, is shown below:
Active Extension Funds (i.e. 130/30)
- BlackRock Australian Equity Opportunities Fund (MAL0072AU) – Highly Recommended
- BlackRock Wholesale Australian Share Fund (PWA0823AU) – Highly Recommended
- Perpetual Wholesale Share-Plus Long-Short Fund (PER0072AU) – Highly Recommended
- Regal Long Short Australian Equity Fund (AMR0006AU) – Highly Recommended
- AMP Capital Australian Equity Opportunities Fund (AMP1783AU) – Recommended
- Antares High Growth Shares Fund (PPL0106AU) – Recommended
- Arnhem Long Short Australian Equity Fund (ARO0019AU) – Recommended
- Ausbil Investment Trust – Active Extension Fund – Retail (AAP0008AU) – Recommended
- Grant Samuel Tribeca Alpha Plus Fund (ETL0069AU) – Recommended
Variable Beta Funds
- Bennelong Kardinia Absolute Return Fund (BFL0010AU) – Highly Recommended
- Perpetual Pure Equity Alpha Fund (PER0668AU) – Highly Recommended
- Evergreen Australian Equities Return Fund (EVG0001AU) – Recommended
- K2 Australian Absolute Return Fund (KAM0101AU) – Recommended
- PM Capital Australian Opportunities Fund (PMC0101AU) – Recommended
- WaveStone Wholesale Australian Equity Long/Short Fund (HOW0053AU) – Recommended
