Zenith Sector Review: Not even Marty McFly can avoid periods of drawdown

Jacob Smart, Zenith Investment Analyst

Jacob Smart

Investors focused on short-term performance will no doubt be disappointed with the underperformance of the Australian Shares long/short sector. However, research by Zenith Investment Partners shows that it is very difficult to produce superior investment outcomes without periods of short-term relative underperformance.

Take Marty McFly, every movie buff’s favourite time traveller. Even if he travelled back in time to 31 March 2014 and invested $130 ‘long’ in the top 10 performing stocks and $30 ‘short’ in the bottom 10 performing stocks, based on their share price performance over the five-year period to 31 March 2019, he would have generated a return of 51.6% p.a. over the five-year period compared to 7.4% p.a. for the S&P/ASX 200 Accumulation Index.

Despite having a time-travelling DeLorean, McFly’s portfolio still experienced a maximum drawdown of 13%, with several periods of underperformance that were more severe than the Index.

Jacob Smart, Investment Analyst at Zenith Investment Partners, believes there are some similarities between the performance of Zenith rated funds and that of McFly’s portfolio.

“While we expect that our rated funds will produce highly attractive returns over the long term, there will be short periods where they will underperform. As such, we emphasise our belief that investors must take a long-term view when investing in actively managed funds.”

Investing for the long-term

The Zenith 2019 Australian Shares Long/Sort Sector Report found that for the 12 months to 31 March 2019, Zenith rated funds returned an average of 5.2% compared to 11.7% for the S&P/ASX 300 Accumulation Index, representing significant underperformance of 6.5%.

Smart attributes the underperformance experienced by this sector to the large dislocation of company valuations within the Australian share market.

“In 2018, the spread between the cheapest and most expensive stocks reached record highs and, even after the fourth quarter correction last year, remained at elevated levels,” said Smart.

“The cheaper segment of the market continued to become even cheaper throughout 2018, while at the other end of the market, the sharp rise in early-to-mid 2018 forced several managers to reduce or exit meaningful short exposures. As such, losses were absorbed and the funds were not in a position to fully benefit from the subsequent valuation contraction experienced in late 2018.”

By Jacob Smart, Investment Analyst

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