Market neutral funds deliver on risk / adjusted returns says Zenith
Zenith Investment Partners (Zenith) has released its 2014 Australian Equity Market Neutral Sector review with all of Zenith’s Approved and above rated funds delivering strong risk-adjusted returns for the one year period ending February 2014.
Impressively, these funds generated returns comfortably in excess of their cash benchmark with significantly lower volatility than the Australian equity market.
The median return for Zenith rated managers was 9.5% compared to 10.2% for the S&P/ASX 300 Accumulation Index, and 2.8% for the UBS Bank Bill Index.
The median level of volatility (as measured by Standard Deviation) was 6.1% compared to the S&P/ASX 300 Accumulation Index of 11.2%.
On a risk-adjusted basis, returns were equally impressive with the median manager delivering a Sharpe ratio of 1.25 for the one year period ending February 2014. This is above Zenith’s long-term expectations (approximately one) for the strategy.
Pleasingly, all managers delivered returns with an extremely low beta or exposure to the Australian share market.
According to Rodney Sebire, a Senior Investment Analyst at Zenith Investment Partners, “The majority of equity market neutral managers reviewed seek to neutralise sector biases by identifying long and short positions within the same sector. While identifying offsetting trades was not always straightforward, most managers demonstrated the ability to adapt and find companies with common return drivers. Furthermore, some managers used multiple positions where they had less conviction on one side of a trade.”
Sebire also added, “To attract the research focus of the managers, a sector needs to exhibit strong price dispersion between its constituents. Intuitively, those sectors where the performance of one company has a direct impact on the performance of another company (or competitor), tend to offer the greatest opportunities.
Market Neutral funds generally delivered strong returns for the 12 months to February 2014 on the back of a strong level in stock dispersion in the market as a whole, and within various sectors. For example, the Consumer Discretionary sector was an extremely profitable sector over the last 12 months.
While the 12 month return for the S&P/ASX 300 Consumer Discretionary sector was 25.6% for the period ending February 2014, the performance of its underlying constituents was significantly different.
From an initial universe of 8 Australian equity market neutral funds: 2 were rated “Highly Recommended”, 2 received a “Recommended” rating and 1 was assigned an “Approved” rating.
Zenith’s complete Approved List for both sectors, broken out by style, and including Zenith’s conviction rankings is shown in the following tables:
