The four studies, which have been conducted over the last three years by the Paul Woolley Centre, focus specifically on behaviour within fund management firms and how they translate into performance for clients.

Professor Bird says: “The good news is that fund managers do have good stock selection skills, but after selecting their key stocks they tend to diversify their portfolios with stocks that dilute performance.  We often glorify diversification but fund managers should hold stocks that they are confidant about and not be obsessed about building a diversified strategy.”

He quotes Warren Buffett who once said “Diversification is protection against ignorance.”

“In our second study, we looked at how fund managers behave through their corporate lifecycle.  They often start as a small fund, and are aggressive, and hold large positions. But as they get bigger and manage more money, they tend to become less aggressive and tend to protect their positions. They become more like index funds to the possible detriment of their clients. “What our studies clearly show is that fund management successes are often determined by chance, rather than skills.  So the clear message for investors is that they should stay away from large fund mangers and look for managers that believe in concentrated investments.

“Investors should diversify their investments amongst small managers and should know when to change their managers. So rather than holding one big diversified portfolio, they should look at several small, concentrated portfolios.

“Our studies show that value as an investment style does outperform. However, investors need to exercise caution as when value managers try to outperform they take value away from their portfolios.

“So who is a really good fund manager? We haven’t got much evidence to tell us who are the good managers and who are bad, as performance is based on chance. It’s an industry governed by chance. So we need to look at behavioural traits. Evidence strongly supports that managers who behave as though they are above-average, achieve the best performance.”

Professor Bird will be presenting key findings of these four studies in detail on 20 May 2014 at ACFS/FINSIA, Melbourne.

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The Taylor Family Scholarship is designed to attract and support outstanding Australian, New Zealand and South African residents or Australian nationals who seek to further their business qualifications, understanding and abilities through a Masters in Finance at this prestigious institution in London, England.

“I wanted to give back to the industry,” said Mr Taylor, who also manages the Fidelity Australian Equities Fund.

“I found my studies at London Business School provided me with a good foundation for a successful career in investment management. I learnt from some of the best academics in the industry and also built some life-long friendships with my classmates from all over the world.”

Paul joined Fidelity in London in 1997 as an Investment Analyst after graduating from the London Business School with a Master of Finance and Bachelors of Commerce and Business from the University of Queensland. Today, the fund Mr Taylor manages – The Fidelity Australian Equities Fund – is rated one of the top Australian equities funds by rating agencies.

The Masters in Finance at the London Business School was recently rated the top course of its kind by the Financial Times newspaper for the second year in a row.

Peter Johnson, Senior Admissions Manager, Masters in Finance, London Business School, said “we thank Paul for his generous contribution to London Business School and his support of up-and-coming Australian finance professionals, who are set to learn from world-class academics and practitioners, and share their experiences with a truly global peer group.

“We’re delighted that Paul has gained so much from his time at London Business School and are grateful for his ongoing support.”

The scholarship will be available from the 2013-14 academic year and be awarded annually, providing the winner with a 20,000 GBP sterling scholarship. The recipient will be determined by the school on broad-based criteria including academic excellence, leadership qualities and contributions to the community.

For more details of the scholarship, click here.

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Investor sentiment in Australia is on the rise and there is a markedly more bullish attitude to Australian equities, according to the quarterly ING Investor Dashboard Sentiment Index released today. However, it seems investors are not acting on this more positive view, still favouring cash and gold deposits over shares.

The survey measures investor sentiment across 12 countries in the Asia Pacific region, focusing on changes in market sentiment, investment attitudes, investment performance and the financial situation of 3,755 investors. These factors are quantified and averaged resulting in a sentiment score. The Australian portion of the survey was conducted amongst 313 investors with liquid assets of US$100,000 or above.

Sentiment in Australia improved after plunging to a low in last quarter’s survey, scoring 135 out of 200 this quarter, well above the 113 of last quarter. However Australia is still lagging against its neighbours and was the third most negative country in the pan-Asian region behind Japan and Korea. Sentiment is also far behind some countries such as India, which was the most positive in the region with a score of 175, and financial centres like Hong Kong which scored 151.

Investors were also more bullish towards Australian equities with 84% thinking the market will either rise or remain stable. Last quarter 39% thought it would rise and 26% said it would stay the same. Investors also believe the stock market will increase by 6.42% over the next three months.

“It is encouraging that sentiment is picking up in Australia, albeit on a lag with Asia, particularly in the equity market where we are seeing an increasingly positive attitude,” said Jim McKay, head of sales for INGIM.

Cashing in

Yet despite this bullish view of equities, when it comes to deciding where to invest, cash and gold are still the favoured option. Gold scored 50 points when rated as an investment while cash deposits scored 31 and local stocks only 23.

Cash was also perceived as the best investment to take advantage of domestic interest rates and was chosen by 55% of respondents, compared to 27% selecting stocks. Similarly, cash and gold were considered the best investments to protect against the European debt crisis with 33% and 44% nominating them respectively.

When asked where they would invest on the risk/reward spectrum, there was a definite weighting towards the safer end. Low risk/return investments such as medium growth managed funds and cash were favourable for 64% of respondents and unfavourable for only 7%, compared to only 23% seeing merit in high/risk return investments like derivatives and 38% finding them unfavourable.

“It is interesting that there seems to be a disconnect between what investors are thinking and what they are doing,” said Mr McKay. “The fact that they expect the equity market to improve, yet prefer cash and gold, perhaps shows that continued volatility in the markets is still making them nervous.”

Australia robust while US economy casts shadow

Most Australians (79%) continue to predict that domestic inflation is on the rise, similar to 78% last quarter, reflecting the ongoing strength in the Australian economy.

Australians also found ways to take advantage of their strengthening currency, with many investors saying foreign currency is a good investment.

“As we all know the Australian dollar has continued strengthening, reaching almost unprecedented highs, and it is interesting to see Australians considering taking advantage of the rising Australian dollar by investing in foreign assets,” Mr McKay said.

When it comes to currency, Australians were also sceptical on the US dollar, with only 10% expecting it to appreciate and 49% expecting it to depreciate further.

In fact Australia had one of the most negative views on the US economic situation of the countries surveyed across pan-Asia, with only 27% thinking it will improve this quarter, compared to 31% last quarter. More than half, 62%, thought it would take three months or longer to recover. Thirty one percent thought US interest rates will rise and 55% thought they would stay the same next year
“With all these pressures it is not surprising investors are still attracted to safer assets, despite predicting increasing stock market strength. Yet this overly cautious attitude could cause them to miss out on opportunities. INGIM sees volatile markets creating good opportunities for quality active managers,” said Mr McKay.

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Now could be a good time to get back into Australian equities with Australian fund managers believing the market is no longer overvalued, according to Russell Investments’ September Investment Manager Outlook (IMO).

Results from the quarterly survey of Australian managers showed that for the first time in nearly two years, none of the managers surveyed believed the local market was overvalued, which is a good signal for investors, said Russell’s portfolio manager Scott Bennett.

“The last time managers said there was no overvaluation it proved to be a signal that the market was at fair value. So, investors should feel comfortable investing money back into the market at these levels, as long as they take a long-term view,” Mr Bennett said. With 60% of managers bullish on Australian equities versus 20% of managers that were bearish, the asset class has remained managers’ favourite for the fifth quarter running.

Global growth concerns still weighing on investor sentiment

Global concerns appear to be weighing heavily on Australian fund managers’ outlook for international shares, with 36% per cent bearish on the asset class due to concerns about a possible US double-dip recession, ongoing concerns in Europe and also whether China can sustain its momentum.

This is in contrast to the June IMO, when managers were decidedly bullish towards international equities.

Overall, Mr Bennett said managers were forecasting sluggish returns from international equities at least until the end of this year, if not for the next six months.

By contrast to Australian managers’ neutral view on international equities, results from the US IMO released last month showed the majority of US managers were more bullish with 57 per cent favoring international markets.

Mr Bennett said the different views of Australian and US managers about the global outlook could be attributed to framing.

“For Australian managers, the international outlook will appear quite bleak compared to our relatively strong performance. However, manager sentiment in the US was more upbeat about a US recovery and that of emerging markets, which may be due to the fact that they have seen how bad things can get and the outlook from here appears relatively better,” Mr Bennett said.

Managers warm to resources but give Telstra the cold shoulder

Mr Bennett said managers were particularly upbeat about resources in September with two out of three managers optimistic about the sector following the revision of the Resources Super Profit Tax (RSPT), to the Minerals Resource Rent Tax (MRRT).

“Globally, Aussie resource stocks were heavily sold-off following the announcement of the RSPT in May. Since it was watered down to the MRRT, we haven’t really seen resource stocks regain their value, leading many managers to see opportunities in the sector,” said Mr Bennett.

Managers also viewed telecommunications as the weakest sector in the market, with the proportion of managers bullish on the sector more than halving since the June survey, from 31 per cent to just 12 per cent. Russell attributes the bearish view to the latest earnings downgrade from Telstra.

“The managers’ view on telcos is largely a Telstra story. This stems from the earnings downgrades that came out from Telstra in the most recent reporting season. Also weighing on managers is the fact that Telstra’s dividend is under pressure as a result of falling margins in the mobile phone business and run off of their fixed line network,” Mr Bennett said.

Although managers were optimistic about Australian shares, they were still cautious about taking on more risk.

“Despite attractive valuations for Australian equities, managers are favoring defensive sectors such as consumer staples as a way of hedging their bets against global concerns that are weighing heavily on sentiment,” he said.

To view a webcast of Scott Bennett discussing the key findings of the Investment Manager Outlook, visit the Russell Investments website.

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