Mark Thomas

van Eyk has awarded five funds its top AA rating from a strong pack in its Australian Equities Review 2013 after one third of funds failed to clear the first hurdle.

The assessment of long-only Australian equities funds considered a total of 69 strategies. Five funds were invited to take part in the review but declined (some of these received a poor rating last year) while 19 funds were screened from the review because van Eyk considered them not sufficiently competitive.

van Eyk believes it is crucial that in investment research there be transparent disclosure of the complete sample of products from which the recommended ones are eventually chosen. This assists financial planners and other research users in judging how selective the ratings process was and therefore the quality of those findings.

van Eyk chief executive Mark Thomas said he was pleased to see this issue highlighted in the recent report on “gatekeepers” in the financial system by the Federal Parliamentary Joint Committee on Corporations and Financial Services. “It’s important that planners can see the outcome for all the funds that were considered in a review” he said. “This also helps discourage ‘ratings shopping’ by fund managers.”

In addition to the five AA ratings, the review awarded 19 A ratings, 18 BB ratings and three B ratings. Ratings of BB and above are considered by van Eyk to be investment grade.

van Eyk Head of Manager Research Matthew Olsen said the key negatives for managers culled in the initial screening process were insufficient levels of active risk in the portfolio, insufficient manager skill and an investment process that was not significantly different from the majority. “A lack of active risk means managers are much less likely to generate meaningful excess return for investors,” Mr Olsen said. “These factors also featured in the reasons for downgrading a number of funds this year.”

A range of investment styles was represented among the recommended managers, with growth, neutral, value and one quantitative manager in the group. Fund details from this review are available to paid subscribers to van Eyk’s research.

van Eyk currently has a “medium” risk rating on the Australian equities asset class.

In van Eyk’s view, the Australian share market has normalised since the GFC but further risks loom on the horizon. In particular, there are risks around the potential for a further slowdown in Chinese economic growth, the weak Australian manufacturing sector and the fact that local banks are trading at a valuation premium compared to their global peers. Good risk control and risk awareness by managers continue to be highly regarded in this asset class.

Lead analyst on the review, Varun Venkatraman, said that over the next two to three years, returns in Australian equities may be lower than long run averages. “While our long term strategic asset allocation recommends 28 per cent of a balanced portfolio be allocated to this asset class we are currently recommending a lower tactical exposure,” Mr Venkatraman said.

van Eyk’s tactical allocations are updated monthly in its Investment Outlook Report.

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van Eyk has just released an additional 10 fund ratings in the Alternatives sector, identifying a further five A-rated managers covering the absolute return, commodities and global macro sectors. 

The Alternatives asset class is being increasingly recognised as a means by which investors can generate additional sources of return uncorrelated with equities and bonds and enhance the long term returns of a balanced portfolio. Globally, pension funds increased their allocation to Alternatives from 5 per cent to 20 per cent between 2005 and 2011.

van Eyk was one of the first in Australia to identify the importance of this asset class and has recommended a 20 per cent allocation to Alternatives in its model balanced portfolio since 2008. 

van Eyk Head of Manager Research and Deputy CIO Matthew Olsen said funds in this sector rated highly by van Eyk received their rating partly due to their ability to protect investors from equity market falls and produce absolute returns. 

“The Alternative funds that van Eyk has recommended have been performing true to label,” Mr Olsen said. 

An example is the Aspect Diversified Futures Fund. This fund is a CTA or Managed Futures strategy which seeks to exploit returns in alternative asset classes (chiefly hard and soft commodities but also bonds and currencies) when equity markets are volatile. 

On the basis of five-year rolling returns, this fund has outperformed the ASX200 index 70 to 80 per cent of the time. 

Furthermore, during the period between the top of the Australian equity market in 2007 and the bottom of the bear market in March 2009, this strategy outperformed equities by 70 per cent. 

“This fund will cushion the blow of falling equities and reduce volatility if used in conjunction with equities or as part of a balanced fund,” Mr Olsen said. 

Mr Olsen said it was important when examining these funds to look at them over the long term. “I have seen some analyses of these types of funds which try to assess them over time periods as short as 12 months,” he said.  “This does a great disservice to investors who have the right approach and try to invest for the long term.” 

Also, it was vital to have the expertise to sift the better funds from the rest, perhaps more so than traditional asset classes because of the relative complexity of some investment strategies. “More managers are seeking to enter this space but van Eyk recommends only the cream of the crop,” Mr Olsen said.

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The funds were previously rated B and BB respectively.

 van Eyk has also cut the rating on the Macquarie High Conviction Fund from an A to a BB. 

The moves come after the announcement that portfolio manager Neil Carter and analysts Jim Copland and Matthew Griffin have tendered their resignation to the investment firm. 

The FundWatch rating is applied when there are significant problems, disruptions or uncertainties with regard to people, process or business management at a fund. 

The departing individuals are the key people in the management of Macquarie’s small companies and microcap strategies. Mr Carter was the lead portfolio manager of both strategies while Mr Copland and Mr Griffin were responsible for the research of large and small resources companies. 

van Eyk Head of Ratings Matthew Olsen said the loss would substantially weaken the quality of Macquarie’s smallcap and microcap offerings. Mr Carter’s nimble approach to investing in smaller companies was a significant loss as was Mr Griffin’s experience in analysing smaller resources companies, given the importance of small miners in the smallcap sector. 

He noted that those analysts who would be assuming their responsibilities were also experienced, but had mainly managed large cap strategies. 

“Our concern for both strategies is further amplified by the current market conditions, which demand close attention by the portfolio manager to monitor and actively manage investment risks,” Mr Olsen said. 

The impact of the resignations on the High Conviction Fund will be less severe, Mr Olsen said. While the fund would be weakened by the loss of Mr Copland’s experience in analysing resources companies in particular, the calibre of the fund’s portfolio manager and the senior members of the investment team remained a key strength of the offering.

Mr Olsen noted that Macquarie was currently reviewing additional measures to strengthen staff retention. “We will look to assess the details of the incentive plan once it becomes available,” he said.

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