Tom Goodrich

United States

Wall Street vs Main Street

Our recent journey across the United States, touching base in bustling hubs like New York and Boston, offered a fascinating glimpse into the current sentiment within the largest global economy.

There is still a constant hum of activity on the streets despite the heightened political climate, murmurs of US exceptionalism waning, and some cautiousness in financial markets.

Uncertainty regarding President Donald Trump’s potential fiscal and foreign policies continues to drive the sentiment on Wall Street. Even with some confirmed trade deals, the unpredictable nature and scale of tariffs remain an ongoing issue.

This apprehension has led to a noticeable shift in how some fund managers positioned their investments during or soon after “Liberation Day”. Many strategically moved towards what they consider “tariff-proof” stocks. This typically meant increasing their exposure to companies that are leaders in their domestic markets (whether that be in the US or outside), thereby reducing the potential impact of unpredictable international trade disputes.

Artificial Intelligence (AI)

I continues to be a hot topic; however, the divergence in performance between the Magnificent 7 constituents throughout 2025 has delivered a different environment for fund managers to adapt to compared to the index concentration of the 12 months prior.

Rather than betting on pure AI companies, most managers are focusing on what are known as “picks and shovels” stocks. These companies sell or maintain the essential infrastructure for AI businesses to function, such as semiconductors, data centres, companies involved in power generation, and even those providing ventilation and air conditioning.

The key takeaway is that there are multiple ways to win from the exponential growth of AI, with managers spreading their exposure to maintain diversification whilst investing in the beneficiaries of the new technology.

On a lighter but notable point, the traditional business card seems to be a thing of the past, and ties have officially followed suit!

By Tom Goodrich, Senior Investment Analyst & Ethan Spiegel, Investment Analyst

United Kingdom

Amongst much gloating from UK-based portfolio managers on the Lions and Wallabies result, there were two key themes from our recent trip to Edinburgh and London.

Corporate consolidation

The UK asset management landscape has been buzzing with corporate activity, mirroring a trend we have seen in Australia. There has been a noticeable increase in mergers and acquisitions in the asset management space, as parties seek scale and broaden their reach. There were several examples of this over the past 12 months, with BNP Paribas acquiring AXA IM, Impax obtaining SKY Harbor Capital, and Foresight Group purchasing WHEB Asset Management.

Responsible investment landscape

The other thematic was the evolving regulatory and political landscape regarding responsible investment strategies. At present, ESG labelling is in a state of change. The introduction of the UK’s Sustainability Disclosure Requirements (SDR) provided welcome guidelines for products in the region, whilst the Australian and EU regulators currently assess (and re-assess) their labelling requirements. These regulations aim to provide greater clarity and transparency regarding the sustainability credentials of investment products. Since their introduction, labelling requirements have prompted many strategies to be renamed, with fund managers generally opting for consistency across regions. Locally, we have seen several changes to fund names as a result.

Within the sustainability-focused subset, global equity impact managers have faced significant performance headwinds. Much of this has been apportioned to the lengths the Trump administration has gone to to repeal environmentally focused elements of the Inflation Reduction Act. This has resulted in the closure of several such impact managers in the UK market, underscoring the evolving dynamics within the responsible investing space and the importance of closely assessing longevity risk when considering allocations.

What’s next?

Looking ahead, we anticipate a busy summer for UK-based fund managers engaging with the Australian market, conveniently aligning with England seeking its first Ashes win in Australia since 2011. Let’s hope for a little less gloating this time around!

By Jock Allen, Senior Investment Analyst & Stephen Colwell, Senior Investment Analyst 

The post What’s next for UK and US equities? appeared first on AdviserVoice.

Tom Goodrich

After years of bull markets that hung most short sellers out to dry, the playing field has recently levelled out, with high global inflation and wide-spread recessionary fears boding well for short selling. SVB Financial Group, Adani and Bed Bath & Beyond are three high-profile stocks that have recently tumbled or filed for bankruptcy, which allowed short sellers to profit handsomely.

It hasn’t just been an offshore phenomenon either, with short selling experiencing a resurgence in Australia over the past year. Shorting is seemingly back in fashion!

When short interest reached 10-year lows in July 2021, the market environment had been dominated by what some would argue was indiscriminate buying and investor greed. Under this backdrop, headlined by the GameStop Saga, investors were seemingly hesitant to short sell over heightened fears of irrational market behaviour. In fact, at that point, the broad market index (as represented by the S&P/ASX 300 Index) had returned 56% from the lows of the COVID-19 sell-off in March 2020. By June 2022, short interest had recovered back above its long-term average, coinciding with a market decline of 9%. As investors became weary once again, short interest reached close to its peak in October 2022.

We believe that short selling returning to historical levels in Australia is a positive, given its contribution to the efficient functioning of financial markets.

In the words of Kynikos Associates founder, Jim Chanos: “Short selling plays the role of real-time financial watchdog. It’s one of the few checks and balances in the market.”

Short selling is not for everyone

The asymmetric nature of short selling is something that’s crucial to understand, with Mohnish Pabrai, founder of Pabrai Investment Funds, summarising a crucial point: “When you look carefully at the economics of shorting, it makes no sense to take the bet. The lowest price a company’s stock can go to is zero, but there’s an unlimited upside.”

Given the risks involved, we believe successful short selling requires specialised experience and expertise. Our Australian Shares – Long/Short peer group consists of highly experienced and skilled professionals who employ thorough risk management practices, including limiting their exposure to highly shorted stocks. This mitigates the risk of extreme negative returns from rapid upward price movements (due to short squeezes).

Which sectors are unloved?

With short selling back in vogue, which market segments are expected to be under pressure? To answer this question, the following chart breaks down where short sellers are positioned from a sector perspective, as at 31 March 2023.

As shown above, basic materials and consumer discretionary companies accounted for almost half of all short interest. Lithium miners such as Sayona Mining, Core Lithium and Liontown Resources top the list of the most shorted stocks within the basic materials sector. As for the consumer discretionary sector, COVID-19 beneficiaries such as Harvey Norman, Breville Group and Temple & Webster were among the most shorted stocks.

How are the experts positioned?

The chart below shows Zenith’s Australian Shares – Long/Short peer group’s average short exposure from a sector perspective.

The consumer discretionary and basic materials sectors only accounted for 32% of all short-sold stocks, which is materially less than the market. Interestingly, industrials accounted for the highest short exposure.

We note that these short exposures are captured in isolation rather than from a holistic portfolio perspective. That is, managers may engage in pair trades, which involves holding a short position that offsets a long position. Pair trading is commonly used to take advantage of a meaningful and unjustified difference in valuations between two similar companies with comparable characteristics.

If diversification is a free lunch, then shorting must be a buffet

With the concentrated nature of the Australian equities market, it can be difficult to successfully diversify portfolios, particularly within a long-only or a low Tracking Error mandate constraint.

The chart below measures industry concentration^[1] in the Australian market (as represented by the S&P/ASX 300 Index). With a total of 11 equally-weighted sectors, a lower value suggests higher sector concentration.

As shown above, sector diversification in the Australian market had been trending upward and reached its peak in September 2020. However, since then, the trend has reversed. As of 31 March 2023, financials and basic materials^[2] accounted for over half of the Australian market. Effectively, an investment in the S&P/ASX 300 Index entailed holding an average of 5.6 equally-weighted sectors out of a possible 11 over the assessed period.

By short selling an inferior company and using the proceeds to purchase a more attractive company operating in a different industry, a long/short manager can increase portfolio diversification from a sector exposure perspective whilst expressing their stock-specific views with greater conviction.

The chart below measures industry concentration^[3] in Zenith’s Australian Shares – Long/Short peer group.

Whilst the peer group faced the same trend of increasing industry concentration from March 2020 to March 2021, managers were able to revert to higher levels of diversification, unlike the broader market. Effectively, an investment in our Australian Shares – Long/Short peer group entailed holding an average of 7 equally-weighted sectors out of a possible 11.

For ease of comparison, the difference in sector diversification between our Australian Shares – Long/Short peer group and the index is captured in the chart below. This time, the values indicate the amount of equally-weighted sectors managers held above the broader market.

Over the assessed period, the peer group consistently maintained significantly greater levels of sector diversification compared to the Australian market. We believe this demonstrates a key benefit of investing with an active long/short manager with professional experience and expertise in short selling.

How has this impacted performance?

Given the flexibility to adjust industry concentration, net market exposure and risk-taking levels depending on the prevailing market environment, we expect long/short strategies to outperform, particularly in declining markets.

Compared to the Australian market, which captured 100% of market drawdowns, long/short managers captured just 76% of the market’s declines over the assessed period. However, the managers were able to participate in over 95% of market upswings. Over the long term, this upside/downside capture ratio suggests long/short strategies can outperform by protecting investors from significant losses.

Controlling risks leads to better investment outcomes

We believe the ability to effectively control risk is paramount in achieving strong investment outcomes. Long/short managers can utilise short selling to increase portfolio diversification. This is particularly important within the context of the Australian equity market, which has seen increasing levels of sector concentration over time.

However, given the asymmetric risk/return profile of short selling, specialised experience and expertise is required to succeed.

With many investors expecting potentially turbulent market conditions, we believe superior investment outcomes can be achieved by utilising skilled long/short managers that can appropriately navigate the risks of the Australian equity market.

By Tom Goodrich, Senior Investment Analyst

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Notes:
[1] Calculated by 1 divided by the Herfindahl-Hirschman Index
[2] 24.1% and 27.3% respectively
[3] Calculated by 1 divided by the Herfindahl-Hirschman Index

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Tom Goodrich

It’s easy to become overwhelmed at the sheer volume of news, predominantly bad, that bombards us on a daily basis. War, pandemic and recession relentlessly frequent the headlines, with no respite.

To gain a clear perspective on the state of certain conflicts, without sifting through the thousands of unnecessarily emotive ‘click-bait’ articles that flood news sites, we surveyed Zenith’s rated international equities – emerging markets managers on their perception of the current state of affairs between different countries, beginning with the Russia-Ukraine geopolitical situation.

Contrary to the negative headlines, of the managers that expressed a view, half believe the market impact of the Russia-Ukraine geopolitical situation will decrease over the next year.

Given the importance of China on global markets and, in particular, emerging markets, we surveyed our rated managers about two topical Chinese geopolitical situations: the China-US situation and the China-Taiwan situation.

The results were not as stark as the Russia-Ukraine survey, with most managers believing the market impact of the China-US geopolitical situation will remain unchanged. Of the managers that believe the market impact will change, the majority believe it will increase.

The number of managers that believe the market impact of the China-Taiwan geopolitical situation will remain unchanged or decrease was split, while a small minority of managers believe it will increase over the next 12 months.

Importantly, for both Chinese-related surveys, most managers believe that the market impact of each of the geopolitical situations will either remain unchanged or decrease, which is contrary to the headline grabbing rhetoric that China is uninvestible.

We’ve seen this movie before…

China is no stranger to equity market volatility, with a major drawdown typically occurring every few years.

Although Chinese equities (as measured by the MSCI China Index $A) have experienced material drawdowns, they’ve historically recovered. Furthermore, when compared against developed market equities (as measured by the MSCI World Index $A), Chinese equities have materially outperformed over the long term.

Prior to the most recent drawdown, which has been severe, Chinese equities had appreciated 509% since the inception of the MSCI Emerging Markets Index $A⁽¹⁾ in January 2001. From this date to 30 June 2022, which includes the most recent drawdown, Chinese equities have still appreciated 339% and materially outperformed developed market equities, which appreciated 152% over the same timeframe.

• Selected start date chosen to coincide with all three indices analysed in the piece having concurrent data.

Is China uninvestible?

China has become particularly topical over the past couple of years, with many market participants becoming fearful that the Chinese Communist Party (CCP) can make sweeping regulatory changes at the drop of a hat that can send shockwaves through its equity markets.

In July 2021, for example, the CCP made changes to the Chinese education sector that sent the after-school tutoring names into turmoil. In addition, more recently, China’s deflating property market has investors concerned about the broader Chinese economy.

However, actions speak louder than words, so we analysed our rated managers’ holdings over the five years to 30 June 2022 to demonstrate whether they believe China is investible. The below charts illustrate the median active Chinese exposure of our rated managers with the performance of Chinese equities (as measured by the MSCI China Index $A).

As we can see, rated managers have maintained their relative underweight to China over the period assessed. However, the average manager decreased their active exposure prior to the drawdown in Chinese equities, before increasing their active exposure prior to the market rebounding. Although our rated managers remain somewhat conservative on China, given the underweight, it’s clear that attractive investment opportunities are arising within the country.

Is an exposure to emerging markets worth the stress?

Given the apparent inefficiencies, we believe an exposure to emerging markets is highly beneficial. The following chart displays the performance of emerging market equities (as measured by the MSCI Emerging Markets Index $A) against developed market equities (as measured by the MSCI World Index $A) since the inception of the MSCI Emerging Markets Index $A (in January 2001) to 30 June 2022.

Since January 2001, the MSCI Emerging Markets Index $A has outperformed the MSCI World Index $A by approximately 2.3% p.a. On a risk-adjusted basis, emerging market equities have outperformed their developed market counterparts, with each achieving a return/risk ratio of 0.47 and 0.38, respectively.

From a diversification standpoint, it’s clear that emerging market exposures complement developed market exposures. The five-year rolling correlation between emerging market equities and developed market equities is shown below.

As we can see, the correlation between the two indices over the long term has been significantly less than one, which leads to diversification benefits when blended in a portfolio. In addition, the benefit of an emerging markets exposure has increased over time, given the negative trend of the correlation over time. Of course, this pertains to index-tracking funds, with no consideration for active management.

A specialist in emerging markets: the key to unlocking superior investment outcomes

Given the specialised nature of emerging markets, we believe a dedicated manager is best placed to capitalise on the apparent inefficiencies.

There is a vast opportunity set available to global investors. The MSCI World Index has 1,513 constituents listed across 23 developed market countries, while the MSCI Emerging Markets Index has 1,387 constituents listed across 24 emerging market countries.

While effective screening tools can reduce the universe to better focus research, we believe a manager that understands the intricacies of emerging market countries and their equity markets is essential.

By Tom Goodrich, Senior Investment Analyst

The post Never let the truth get in the way of a good emerging markets story appeared first on AdviserVoice.

Retail investors who backed these popular stocks had every right to question the notion of handing over their hard-earned savings to a professional investor.

What’s happened since?

Fast forward almost two years, have the same popular stocks run out of steam? The below chart shows the performance of these stocks relative to the broader benchmark since our initial note in September 2020, as represented by the dashed line.

The basket of popular stocks has experienced a significant sell-off since September 2020, falling approximately 39% (as at 31 May 2022). Comparatively, the broader benchmark continued its upward trajectory, rising 27% and outperforming the basket by 66%. Furthermore, if an investor was caught up in the frenzy and purchased the basket at the peak, they would have experienced a drawdown of approximately 51% (as at 31 May 2022). We note that, following recent market movements, the basket’s drawdown has extended a further 11% (as at 17 June 2022).

How can professional long/short managers capitalise on this?

Active fund managers seek out market inefficiencies, which in this instance, potentially appeared when the share prices of the popular companies began rallying with arguably minimal fundamental basis. Unlike long-only managers who are restricted to purchasing stocks, long/short managers can capitalise on these inefficiencies by short selling stocks that they believe are overpriced or overhyped.

Following the COVID-19 market crash, retail interest in share trading accounts was at an all-time high, which we believe fuelled the meteoric rise of the popular stocks. Whilst this trend has persisted above pre-pandemic levels, interest has begun to wane, illustrated by the following chart.

As shown above, using the Google search term ‘Commsec’ as a proxy, retail interest in trading accounts hit an all-time high in March 2020 during the peak of the crisis. Furthermore, as the performance of the composite basket reached its highest point in February 2021, retail interest in trading accounts followed suit, rising to its second highest level over the assessed period. However, in line with our expectations, the recent challenged performance of the popular stocks saw retail investor interest decline.

Have investors been shorting these popular stocks?

The chart below shows the average shares held short as a percentage of total shares outstanding (‘short interest’) for the basket of popular stocks relative to its performance.

Evidently, short sellers have benefitted from the price decline of popular stocks. Short interest declined as the popular basket rallied from its COVID-19 trough. Following a period of price stagnation and relative stability in financial markets, the short interest of the popular basket of stocks increased again, with investors seeking to capitalise on what they believed were overhyped stocks.

How have professional investors performed in recent market volatility?

The natural question to ask is whether or not active managers were able to add value during this turbulent period. The chart below highlights the relative performance of Zenith’s rated Australian Shares – Long/Short funds (after fees) and the S&P/ASX 300 Accumulation Index.

Pleasingly, our rated Australian Shares – Long/Short funds outperformed the S&P/ASX 300 Accumulation Index from 23 March 2020 (the bottom of the drawdown) until 31 May 2022, achieving excess returns of approximately 10% p.a. (after fees).

In addition to the peer group achieving higher absolute returns than the benchmark, it also protected investor capital. The chart below shows the outperformance of the peer group in months where the benchmark recorded a negative month.

As we can see, the peer group underperformed the benchmark when it fell in only two instances. Moreover, we note that the peer group’s downside protection during these periods contributed to approximately a third of its 10% p.a. outperformance over the assessed period.

Leave it to the professionals

Whilst we acknowledge that cognitive biases and specifically, the fear of missing out, are difficult to control, we believe it’s imperative that investors look through the noise when selecting their investments. Moreover, we believe professional active managers, who have substantial experience in a variety of market environments, are best placed to do this and achieve strong, risk-adjusted returns over the long term.

By Tom Goodrich, Senior Investment Analyst

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