Zenith reports good returns with ‘lower than market’ volatility in current Australian Long/Short Sector Review

Rodney Sebire

Zenith has just released its Australian Long/Short Sector Review, and over the twelve months to 31 May 2015, Zenith’s Australian Long/Short –  Active Extension and Variable Beta managers delivered an average return of 10.2%, outperforming the Australian equity market (as represented by the S&P/ASX 300 Accumulation Index) by 0.3%.

This outperformance was achieved with an average of approximately 80% market exposure and lower volatility (as measured by Standard Deviation) than the broader market.

According to Rodney Sebire, Senior Investment Analyst, and Zenith’s lead analyst on the sector, the market environment has been favourable for long/short managers. “Some of the key determinants for success in long/short have been in place – a low correlation of performance between industry sectors and high performance dispersion within sectors.”
Sebire went on to add “By way of example, the Healthcare and Telecommunication sectors returned 33% and 24% respectively over the last twelve months, versus Energy and Consumer Staples, which returned -15% and -7%, respectively.  And there hasn’t been a lack of opportunities on the short side.  From a market value perspective, Woolworths and Orica were two of the most heavily shorted companies. Woolworths has suffered from declining margins and losses from its Masters business, while Orica navigated a change in CEO and declining demand for its explosives products”.

Over the next twelve months, Zenith expects the conducive environment for long/short investing to continue.  Sebire notes “Zenith expects further mean reversion in those sectors that have been artificially inflated by the yield trade; the likes of Financials (Banks), Telecommunications, Healthcare and Property.  We believe this should create opportunities for appropriately skilled long/short managers.”

In this year’s sector report, Zenith outlines its approach to using Australian long/short strategies in client portfolios, which includes a detailed review of the potential diversification benefits.  As part of the analysis, Zenith analyses the “levers” that a long/short manager can pull to generate excess returns.

Summary of the Zenith 2015 Australian Shares Long/Short Sector Review: