Quan Nguyen
2016 was a year of unexpected outcomes. Leicester City won the English Premier League, the UK Brexit vote the US Trump election and … actively managed Australian small cap managers underperformed the benchmark.
Announcing the release of Zenith Investment Partners Australian Shares – Small Companies Sector report, Senior Investment Analyst, Quan Nguyen, said “Not since 2005 has the median active small cap manager, rated Approved or above by Zenith, experienced sustained underperformance relative to the benchmark on a rolling one-year period basis. In fact, between April 2011 to October 2014, even the bottom quartile fund consistently outperformed the benchmark. At one point, by as much as 14%”.
According to Zenith, the key driver of this underperformance was the powerful rebound in small cap resource stocks.
Nguyen elaborated, “While underweighting resource companies has provided small cap managers with a strong outperformance tailwind over recent years, this reversed in 2016. In fact, small cap resources outperformed small cap industrials by a whopping 53% over the year,”
Fees a hot topic again
Zenith also highlighted the current state of manager fees in the report. “Fees have again been a hot topic in recent years as we have seen an increase in popularity for low cost index products”, Nguyen noted.
“Managers charging higher fees often face pressure to reduce their overall fee load to clients regardless of whether the fund has been able to meet its objectives”.
To assist clients in assessing whether or not the fees charged by active managers are fair, Zenith has developed a methodology, which comprises both forward and backward looking components.
Nguyen concludes that, “Despite short-term underperformance, the majority of our small cap managers have justified their fees due to strong excess performance over our medium-term assessment window. In addition, we highlight the importance of assessing performance on a net of fees basis. That is, higher fees may not necessarily be an adverse outcome for investors, as long as strong excess returns are generated correspondingly”.
Summary of the Zenith 2017 Small Cap Sector Review
From an initial universe of 60 products:
- 3 were rated “Highly Recommended”
- 29 were rated “Recommended”
- 6 were rated “Approved”
- 21 were “Not Rated”
- 1 was rated “Redeem”