Robert da Silva

van Eyk Research has released its 2014 Australian Equities Review –as it enters the final stages in its highly-anticipated 2014 Fixed Income Review.

According to the review, value managers have significantly outperformed growth and style-neutral managers over the last three years with lower levels of risk, however, investors should brace themselves for extremely challenging economic conditions ahead.

A number of fund managers who participated in van Eyk’s latest Australian Equities Review believe there are still some pockets of value left in the market but the general consensus is that the market is fair-to-fully valued.

Robert da Silva, van Eyk’s head of manager research and deputy chief investment officer said the majority of large cap value managers, and various style-neutral managers, agreed that the valuations of the big banks had become stretched. Broadly, defensive and high yield stocks appeared to be at full, or near full, value.

“There continues to be a flight to quality and yield stocks, which can deliver growth at the micro level within the context of sub-par macroeconomic growth,” da Silva said.

Despite being underweight the financial sector, large cap value managers posted some stellar returns for the year to June 30, 2014. Growth managers, on the other hand, were comfortable being overweight banks, despite acknowledging the sector was at, or approaching, full value.

Value and growth managers in the large cap space were relatively optimistic on the materials sectors, notwithstanding the battering that mining companies have taken in the past few years. Both groups maintained overweight positions greater than 4 per cent.

In the small caps space, most managers were unwilling to rotate into the materials sector and held an underweight position due to the Small Ordinaries Index’s composition of poor quality mining and mining services companies.

In total, van Eyk considered 98 strategies across both the large cap and small cap universe with four large cap managers and four small cap managers receiving the firm’s highest rating of “AA” while 22 large cap and nine small cap managers were awarded an “A” rating.

Of the 98 strategies considered, 56 strategies participated in the review.

van Eyk’s research team, which is headed by da Silva, is currently in the middle of the 2014 Fixed income Review. The results of the Fixed Income Review are scheduled to be released in coming weeks.

Pre-screening is also underway for the 2014 International Equities Review.

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Robert da Silva

The environment is ripe for experienced Australian equity stockpickers and whole teams to break away from large investment houses and set up their own funds management boutiques, according to one of Australia’s leading investment research houses.

According to van Eyk Research, a number of well-established Australian small cap managers are experiencing capacity constraints and may close to new money in the near future, which will pave the way for new entrants.

Robert da Silva, van Eyk’s head of manager research and deputy chief investment officer, said the strong performance of Australian small cap managers in the past year, combined with steady inflows, had boosted the sector’s funds under management and pushed some managers closer to capacity.

“This has created an encouraging environment for new players to emerge in the small cap space,” he said. “Boutiques that have a quality team and investment process, and a consistently strong track record, should do well.”

However, there is still a disproportionately large number of core Australian equity managers given the relatively small size of the Australian market, da Silva said. He noted that only a small number of core and concentrated Australian equity strategies had been launched in the last few years while several boutiques had been shut down.

He identified a number of major headwinds for Australian equity managers including investors’ growing preference for direct shares, a reduced appetite for risk and valuations approaching fair value.

“The consensus view is that Australian shares are close to fair value but there are still opportunities for skilful active managers to add value,” da Silva said.

“The difference between the best and worst performing small cap manager in the past year was around 40 per cent which highlighted the value that can be added by choosing the right manager. By comparison, the performance differential in the large cap space was around 20 per cent.”

da Silva’s comments coincide with the release of preliminary findings from van Eyk’s 2014 Australian Equities Sector Review, which covered a universe of 56 Australian equity strategies.

van Eyk’s qualitative and quantitative evaluation began with a pool of 98 managers. This cohort was then narrowed to a group of 39 large cap and 17 small cap strategies who were invited to participate in the full due diligence process.

Of these, two large cap managers and one small cap manager refused to be included.

Only a handful of large cap managers were awarded van Eyk’s highest “AA” rating, demonstrating superior strength particularly in relation to investment research and the ability to garner unique insights and capitalise on them.

The van Eyk 2014 Australian Equities Sector Review saw four large cap strategies upgraded and three downgraded from 2013.

In the small cap space, da Silva said there was intense competition with a higher concentration of “AA” and “A” rated managers and a substantially lower number of strategies rated “BB” or “B”. Four managers were awarded the coveted “AA” rating.

Two small cap managers were upgraded but no strategies were downgraded.

“Funds managers are not automatically included in a sector review but must pass our initial screening process,” he said. “By excluding managers who are unlikely to achieve a recommended rating from process, we’re able to focus on higher quality offerings.”

A full report on the van Eyk 2014 Australian Equities Sector Review is being finalised and will be available by the end of June.

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Robert da Silva

The current economic landscape is full of major economic and political threats which have the power to devalue assets and destroy wealth, according to investment research firm van Eyk Research.

Speaking at van Eyk’s Annual Conference in Sydney yesterday, Robert da Silva, van Eyk deputy chief investment officer and head of manager research said the five biggest challenges facing investors were the unwinding of monetary stimulus by central banks, deflation across Europe and in the US, a further slowdown of China’s growth, and political instability and rising debt levels in the emerging markets.

“Unfortunately 2014 is unlikely to be as clear cut as 2013 which was an exceptional year for risky assets and a tale of woe for fixed income markets,” he said.

“The volatile economic environment and the change in valuations, with global equity markets delivering returns in the range of 20 per cent to 50 per cent last year, have made assessing the markets a very difficult task.”

Mr. da Silva told delegates to get comfortable with Fed tapering and the jittery markets that often followed any mention of it by central bankers and financial commentators.

He urged investors not to get caught up in the mania and panic that ensued after the release of vital economic data and to avoid costly buying and selling.

Instead he cited data which showed the benefits of sticking to long-term objectives and investment strategies.

“Tapering is here and the Fed has the difficult task of withdrawing its buying support of US Treasuries without upsetting the progress of a consistent but fragile economic recovery,” Mr. da Silva said.

“At the same time, core inflation in the US has been in a downward trend while unemployment remains higher than acceptable.  This must be reversed to avoid the possibility of inflation. Europe is grappling with similar issues and may require further easing.

Mr. da Silva said the emerging markets were being hit hard by the impact of tapering as well as political unrest, resurgent inflation, current account deficits, currency volatility and return on equity compression relative to developed markets.

“The long term view would look to the favourable demographics, productivity dividend, growing middle class and relative cost advantages that have attracted investors to emerging markets for decades, however, emerging market stocks have not performed as well as their developed market counterparts in the last 18 months,” he said.

“Furthermore, there is a laundry list of issues bedevilling emerging markets at the moment and volatility is likely to persist in the short term.”

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Mr Vaiente comes to van Eyk with over 15 years’ experience in business development, mergers and acquisitions of financial planning practices and planner recruitment at IPAC Securities, ANZ’s OnePath and Zurich.

van Eyk chief executive Mark Thomas said the appointment signalled van Eyk was moving ahead and growing its footprint in financial advice. It follows the recent appointment of veteran BT portfolio manager Robert da Silva as Head of Manager Research and Deputy Chief Investment Officer.

“We believe van Eyk has a unique and compelling offering in financial advice that offers a real alternative to the institutionally-owned model,” Mr Thomas said. “We offer planners an integrated solution, including fundamental investment research, funds management, asset consulting and practice development through our subsidiary Encore.”

Besides Encore, van Eyk’s major brands include van Eyk Research (investment research, ratings and asset consulting), the Blueprint Series of multi-manager investment funds and iRate (the online portal for manager research, asset allocation and portfolio construction tools).

Mr Vaiente will focus on building van Eyk’s advice capabilities in both Australia and across the Tasman, following business acquisitions in New Zealand earlier this year and the subsequent launch of van Eyk Advice New Zealand and Blueprint Investment Management Limited.

“I am excited about the opportunity to work for a company that has something genuinely different to offer advisers and investors,” Mr Vaiente said. “We can give advisers the tools, professional support and investment solutions that allow them to concentrate more on what they do best: providing quality financial advice.”

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Mr da Silva is replaced by Bill Armstrong who joins Jon Taylor and Tina Paris, in the team of three responsible for the management of the fund.

“We will review the ‘On Hold’ status of the fund when we meet with the fund manager in early December, as part of our yearly review of the Global Fixed Interest peer group,” said David Erdonmez, analyst at S&P Fund Services.

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So says Robert da Silva, Managing Director, Asia-Pacific Fixed Income, Principal Global Investors. “A number of themes have emerged in the massive shift that has occurred – and is continuing to occur – post-GFC, turning some of the accepted notions of fixed income investing on their head,” he said.

“It’s important for investors to stay in tune with these shifts and changes and think through their implications, both for their broader portfolios in the way assets are allocated and diversified within the fixed income space.” Some of the key changes Mr da Silva cited are: 

1.  A move away from government or sovereign debt.

“The old idea of government bonds being 100 per cent safe has been turned on its head in the wake of the peripheral European crisis and in the face of the looming debt ceiling deadline in the USA, and its potential to lead to a downgrade. While a Congressional vote to lift the ceiling is likely, the situation has thrown into question the accepted ‘guaranteed risk-free’ status of US Treasuries,” said Mr da Silva.

This situation is linked to one of the key post-GFC themes: the massive shifting of debt from the private sector into government, which leads to the next change.

2. Increased appeal of corporate, or private, debt.

While government has been taking on a greater debt burden, corporates have spent the years since the GFC intensively deleveraging and divesting themselves of non-performing businesses and assets.

“High yield default rates are continuing to fall and the corporate sector is in many respects sounder and more prudent than its public counterpart,” Mr da Silva explained.

Mr da Silva pointed out that this is particularly evident in the credit default swap market, where the cost of insuring government debt has soared – from two basis points for $5 million in US Treasuries pre-GFC to some 53 basis points today.

“We now find ourselves in the unprecedented situation where there are 29 companies with lower credit default swap spreads than for the US Sovereign: IBM, McDonalds, Walt Disney, Wal-Mart and UPS, just to name a few.” 

3. Equities: no longer the only growth asset?

“When you look at the past 10 years in the United States, the S&P 500 has barely moved,” said Mr da Silva.

“We are looking at 1372.71 at end-June 1999 to 1320.64 at end-June 2011, a return of -0.32% each year for 12 years. These are ex-dividend figures, but even including dividends only brings the return to +1.50%, well behind 3 month T-Bills (+2.58%) and consumer inflation (+2.54% p.a.). I think this should call into question some of the generally held underlying assumptions about long term growth assets.

So, what does all this mean for the fixed income investor?

“An intelligent approach is to insulate the portfolio from the downside and focus on the opportunities,” said Mr da Silva.  

“We suggest closer involvement in the credit market, looking at corporate, high yield and emerging market assets in particular, with an eye out for the right asset-backed and credit-backed securities. This is particularly the case in the light of what’s happening with commercial property in the United States, which is coming back, with commercial-mortgage-backed securities still priced relatively cheaply despite yields coming down a bit recently.”

The second feature to look out for is duration – specifically, shorter term.

“We are looking at shorter durations in order to hedge against concerns about inflation and rate rises on the horizon, so we can minimize the damage should that occur.

“Again this is a departure from conventions where investors generally would look at longer bond funds, and again this is what we believe is required to succeed in the new environment. It’s all about staying alert and informed, and acting strategically.”

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