The Australian Institutional Sector Survey is designed to enable institutional investors, superannuation trustees, asset consultants, and other market participants to meaningfully compare Australian investment strategies.

Key Findings

• Performance across domestic assets was subdued over the month of November. Australian shares were up 0.4 percent, and Australian real estate investment trusts (AREITs) returned -1.3 percent. To date, Australian shares have recorded a healthy return of 17.4 percent for the calendar year, and there has been 10 months of positive performance, with May the solitary month with a negative return.
• The Australian sharemarket was up 5.6 percent over the three months and 14.2 percent over the year to 30 November 2012. Longer-term returns for the S&P/ASX300 Accumulation Index were 2.9 percent over three years, -3.0 percent over five years, and 8.5 percent over the 10 years to 30 November 2012.
• Healthcare (6.1 percent) was the standout sector of the Australian sharemarket over the month of November. Telecommunications services (3.8 percent) and consumer discretionary (3.4 percent) also provided solid results over the month. Poorer-performing sectors included energy (-2.7 percent), resources (-1.5 percent), and AREITs (-1.3 percent).
• The median Australian share fund manager outperformed the index by 0.2 percent with a return of 0.6 percent over the month. Longer-term, the median manager produced 14.4 percent over the year and 3.0 percent over the three years to 30 November 2012. The best-performing Australian share strategies over the three years to 30 November 2012 were Investors Mutual (8.6 percent), followed by Bennelong Concentrated (8.2 percent), and Dalton Nicol Reid (7.5 percent).
• International sharemarkets in Australian dollar terms were up in aggregate over the month to 30 November 2012, the MSCI World ex-Australia NR AUD Index posting an 0.7 percent return. The best-performing sectors were consumer discretionary (4.0 percent), consumer staples (2.7 percent), and information technology (2.6 percent). Utilities and energy were the worst-performing sectors with monthly returns of -2.4 and -1.5 percent respectively.
• The median international share fund manager returned 0.8 percent over the month, 12.1 percent over the year, and 2.6 percent over the three years to 30 November 2012. Magellan (12.1 percent), Fidelity (6.3 percent), and Platinum (4.8 percent) were the best performers over the three years to 30 November 2012. 
• The Australian property securities sector fell -1.3 percent over the month of November 2012. The best performers over the three years to 30 November 2012 were Legg Mason (14.0 percent), followed by Zurich (13.2 percent) and APN (12.2 percent).
• The UBS Composite Bond Index returned 0.01 percent for the month and 8.4 percent over the year to 30 November 2012. Perpetual (11.6 percent), AMP (11.2 percent), and Legg Mason (11.1 percent) were in pole position among Australian fixed income strategies for the year to 30 November 2012.

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van Eyk Head of Asset Consulting Jonathan Ramsay said an analysis of top performing managers showed that fund outperformance very rarely lasted for more than a few years before it petered out, or worse, took some or all of that outperformance back by underperforming the market index. 

Since the flow of funds from investors into an outperforming manager typically grew exponentially as its level of outperformance increased, most money would flow into the fund as its performance was peaking. 

“By weight of money many investors in these funds will end up being disappointed”, Mr Ramsay said. 

The analysis was based on a list of core, style neutral Australian equity funds which had outperformed the Australian equity market by five per cent per annum at some point over the last 20 years. This was the “crème de la crème” of Australian equity funds, Mr Ramsay noted. In fact, only ten funds met that performance standard. 

The performance of these funds showed that even though their outperformance could go on for a number of years, they all either went on to have long periods of underperformance, or at best, performed in line with the market. 

Mr Ramsay said the problem with previous studies on persistency in fund performance was that they used average measures of performance or the results were highly dependent on the time horizon chosen. “We took a closer look at whether any individual managers had actually provided persistently strong outperformance or whether they had just managed to catch a market wave, a wave which inevitably subsides,” he said.

Mr Ramsay said the only way investors could reliably take advantage of a strongly performing fund was to try to predict periods of outperformance and invest before it occurred rather than chasing the chimera of past performance. 

He said fund outperformance tended to be episodic and investors needed to take into account more than how good a manager and their investment process was. “Stock-selection doesn’t happen in a vacuum and having a view about the market and the interaction between that and a manager’s investment process is very important,” Mr Ramsay said. 

He said the notable achievement of the best and most enduring funds management organisations was avoiding underperformance when markets were subdued while being able to catch the next market wave when it came along.

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