The product seeks to dynamically safeguard investors against large downside losses while allowing for full participation in domestic equity market gains. It provides investors with a bottom-up, Australian equities portfolio comprised of large and small cap listed companies and uses equity derivatives and cash to dynamically protect the portfolio through market cycles, thereby reducing the magnitude of significant negative returns as they occur.

Called the Perennial Value Wealth Defender Australian Shares Trust, the fund was launched by Perennial Value Management Limited (Perennial Value) in late May 2014. It has subsequently secured a Recommended rating from independent investment research firm Zenith Investment Partners.

Head of Retail Funds Management for Perennial, Brian Thomas said the Zenith rating was a welcome independent validation for the fund. The fund has also resonated strongly with financial advisers in the days since its retail launch.

“The stark reality we all faced during the GFC was that a 50% fall in our share values required a 100% future return to get back to pre GFC levels, and investors are expecting further volatility in the future. According to recent Investment Trends research, 91% of financial advisers are expecting two or more market crashes in the next 20 years and the investors we speak to have similar outlooks, ” Mr Thomas said.

“We believe Perennial Value has created an innovative product that is purpose built for the needs of investors and it brings a unique and dynamic approach to managing downside risk.”

“The fund’s unique design and underlying protection process is unlike anything available to Australian retail investors to date,” he said. Mr Thomas said Perennial Value’s considerable investment management expertise (led by renowned value investor John Murray) coupled with its dynamic portfolio protection strategies adds a new dimension to the management of market volatility on behalf of investors. The fund’s dynamic portfolio protection strategies are managed by Perennial Value’s Dan Bosscher.

Zenith’s report said the fund: “…provides investors with a unique exposure to Australian equities which is intuitively appealing. Through the use of dynamic protection strategies, the fund aims to create an asymmetric return/risk profile that is designed to reduce losses in market downturns by approximately 50 per cent whilst allowing for full participation in market upswings. Zenith believes the fund is an innovative product managed by a highly capable risk expert in Dan Bosscher.”

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Steven Tang

Several Fixed Income Managers will need to expand their current investment toolkit going forward according to Steven Tang, Senior Investment Analyst at Zenith investment Partners according to their 2014 Australian Fixed Income Sector review released last week.

Tang noted “one relatively simple and key way for active managers in the sector to outperform over recent years has been to overweight corporate debt (i.e. credit) in their portfolios”.

The spreads (margin over government bonds with equivalent maturities) on these instruments have narrowed aggressively due to the insatiable investor demand for income producing assets in a zero interest rate policy world.

Consequently, manager portfolios have benefited as prices have risen on these instruments. Whereas this environment has favoured managers with a credit orientation, spreads have tightened to such a degree now that the future may favour those with a more diverse skillset.

However, despite making this observation, Tang notes that managers continue to maintain a healthy overweight to credit in their portfolios, believing that it still offers value.

In a world of reduced market liquidity, Tang highlights that this poses potential challenges and risks for managers and hence investors.

While one primary way managers have attempted to address these risks is through their expanded use of credit derivatives, Tang cautions that they may not offer the panacea advertised in a large scale credit event, or in the face of large-scale fund redemptions.

Nevertheless, despite this cautionary tale Zenith believes that fixed income remains a crucial part of any medium to long term portfolio structure.

However, it is very important that investors understand the risks that are embedded in manager portfolios and seek managers that have ability to add value in different market environments.

Over the 12 months to 31 May 2014, the Australian fixed interest market, as represented by the UBS Composite Index (All Maturities), returned 4.14%.

From an initial universe of 78 Cash and Australian Fixed Interest funds reviewed in the report, 4 were rated “Highly Recommended”, 23 “Recommended”, 9 “Approved”, and 42 “Not Rated”.

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Jonathan Baird

Hedged infrastructure funds may be a better option than their unhedged counterparts according to Zenith Investment Partners Infrastructure Sector Review released this week.

“Investors need to consider many factors when making the decision between hedged and unhedged listed infrastructure investments”, says Jonathan Baird, Investment Analyst with Zenith.

“Volatility is definitely a key consideration.  During periods of heightened volatility, such as the GFC or the European Credit crisis, the difference in the level of volatility of unhedged versus hedged global equities has definitely been to the advantage of unhedged investors.  That is, unhedged global equities have experienced lower levels of volatility than hedged global equities.   But for global listed infrastructure, the same relationship hasn’t been as strong. During the GFC, unhedged infrastructure strategies provided a dampening of volatility, but this wasn’t the case during the European crisis of 2011 for example, and overall, the volatility of hedged and unhedged Infrastructure strategies has been much closer over time.”

In Zenith’s sector report, other factors such as the income distribution processes that Infrastructure managers need to contend with, and the fact that valuations are often undertaken in the listing currency are also considered.  Baird goes on to say, “Overall, we don’t believe the benefits for remaining unhedged are as strong in infrastructure versus global equities for example, and therefore we would generally advocate using hedged in infrastructure and unhedged in global equities when planning a long term neutrally hedged portfolio structure.”

The report also discusses the potential impact of some of the infrastructure asset sales proposed by state governments in Australia, and takes a deeper dive into the Master Limited Partnership (MLP) structure which has seen significant growth in the infrastructure sector in North America.

From an initial investment universe of 15 Infrastructure products, 4 were rated “Highly Recommended’; 5 “Recommended”; and 2 were rated “Approved.

Zenith’s Approved list for the Infrastructure Sector:

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Jonathan Baird

While the interest rate sensitivity of REITs has recently spiked, Jonathan Baird, Investment Analyst with Zenith Investment Partners, believes this is a relatively short-term trend and should not be relied upon for structural asset allocation decisions.

When discussing Zenith’s Property Sector Review released this week Baird said ‘The view that REITs have bond like characteristics may be partially derived from the income pass through that is supported by the trust tax structure. This structure generally results in higher dividend yields and payout ratios relative to broader equity markets. However, changing property valuations and fluctuating earnings streams have delivered varying correlations to the Australian bond market over the past ten years’.

Baird said “Generally, managers continue to view the sector as trading at fair value, with many believing current conditions are relatively conducive for active management”. The report also notes that many managers in both domestic and global REITs are anticipating a total return in the range of 7% to 9% for the next 12 months.

From an initial investment universe of 70 Property products 5 were rated “Highly Recommended”; 15 “Recommended”; and 9 were assigned an “Approved” rating. In addition to the investment grade ratings, 3 funds were placed on “Redeem”; 36 were “Not Rated”; while 2 strategies remain “Under Review” due to investment staff departures.

The report highlights that both the domestic and global REIT (hedged) sectors performed slightly below expectations, achieving 4.9% and 5.1% respectively for the 12 months to March. While this performance was materially down on the exceptionally strong prior year, it does support the thesis that REITs have returned to more traditional and conservative business models.

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Impressively, these funds generated returns comfortably in excess of their cash benchmark with significantly lower volatility than the Australian equity market.

The median return for Zenith rated managers was 9.5% compared to 10.2% for the S&P/ASX 300 Accumulation Index, and 2.8% for the UBS Bank Bill Index.

The median level of volatility (as measured by Standard Deviation) was 6.1% compared to the S&P/ASX 300 Accumulation Index of 11.2%.

On a risk-adjusted basis, returns were equally impressive with the median manager delivering a Sharpe ratio of 1.25 for the one year period ending February 2014. This is above Zenith’s long-term expectations (approximately one) for the strategy.

Pleasingly, all managers delivered returns with an extremely low beta or exposure to the Australian share market.

According to Rodney Sebire, a Senior Investment Analyst at Zenith Investment Partners, “The majority of equity market neutral managers reviewed seek to neutralise sector biases by identifying long and short positions within the same sector. While identifying offsetting trades was not always straightforward, most managers demonstrated the ability to adapt and find companies with common return drivers. Furthermore, some managers used multiple positions where they had less conviction on one side of a trade.”

Sebire also added, “To attract the research focus of the managers, a sector needs to exhibit strong price dispersion between its constituents. Intuitively, those sectors where the performance of one company has a direct impact on the performance of another company (or competitor), tend to offer the greatest opportunities.

Market Neutral funds generally delivered strong returns for the 12 months to February 2014 on the back of a strong level in stock dispersion in the market as a whole, and within various sectors. For example, the Consumer Discretionary sector was an extremely profitable sector over the last 12 months.

While the 12 month return for the S&P/ASX 300 Consumer Discretionary sector was 25.6% for the period ending February 2014, the performance of its underlying constituents was significantly different.

From an initial universe of 8 Australian equity market neutral funds: 2 were rated “Highly Recommended”, 2 received a “Recommended” rating and 1 was assigned an “Approved” rating.

Zenith’s complete Approved List for both sectors, broken out by style, and including Zenith’s conviction rankings is shown in the following tables:

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John Nicoll

Zenith Investment Partners (Zenith) has announced the release of its new look website that has been designed to help advisers accurately assess whether Zenith is the most suitable external research support for their business.

The new website has been significantly redeveloped to enhance Zenith’s information offering to advisers and one of the new features is the introduction of Zenith TV to provide brief, concise summaries of the key takeouts from sector reviews, portfolio construction ideas and responses to general adviser queries.

, Zenith National Sales Manager said, “In the RG79 guidelines for research houses released last year, ASIC made it very clear what the expectations are of research houses and the type of information they expect to be publicly available.”

“They (ASIC) want advisers to be able to fully understand the service offering of research houses, the depth and quality of research that is actually undertaken, business models, breadth of coverage, percentage of funds receiving positive ratings, and an ongoing history of those ratings.”

“Zenith has made all of this information available on its website so that our advisers know how the organisation operates, why we operate that way, where Zenith’s services can help them, and those areas that it can’t.”

“Zenith is constantly evolving its marketplace offering to ensure we deliver the best possible outcome to our clients all the time.”

Nicoll concluded by inviting the adviser community to take a few moments to visit the Zenith website and contact Zenith if they have any further questions.

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Ross Kent

Global asset manager AllianceBernstein’s diversification into the Australian retail market continued when the firm announced that its Global High Income Fund (GHI) had been rated ‘Recommended’ by independent investment research provider Zenith Investment Partners.

The Fund—which is being offered in Australia for the first time—has a track record of more than 16 years in offshore markets. It aims to achieve income returns in excess of the Australian cash rate after fees over the cycle.

“This rating is a significant milestone in executing our diversification into the Australian retail investment market,” said Ross Kent, Executive Director at AllianceBernstein Australian Ltd.

The Fund invests into predominantly sub-investment grade (high-yield) corporate debt as well as emerging market sovereign and corporate debt. Zenith noted in its rating report that the Fund also has a relatively wide mandate and invests in high-yielding securities in other fixed-interest sectors.

“From a portfolio perspective, the Fund may be suitable as a component in the income portion of a well-diversified portfolio. The Fund is considered appropriate as a satellite exposure to global fixed interest and for blending with domestic fixed-interest strategies to produce a more balanced set of investment outcomes,” the research firm said.

“We believe the Fund is suited to investors who, in an environment of low cash rates, want to improve the income generating capacity of their portfolio,” said Kent, who noted that the strategy had raised more than US$22 billion from investors globally since 1997.

“We also expect that it will be of interest to investors who are willing to substitute some of their overweight in domestic or global equities towards return-seeking fixed-income assets.”

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International share returns solid for 2013.

While 2013 isn’t quite over yet, global and emerging markets have returned far greater results than one would have expected at the start of the year.  One year returns (as at 30 September 2013) for the MSCI World ex Australia and MSCI Emerging Markets indices (in $A) were 34.0% and 12.3% respectively.

Bronwen Moncrieff, Head of Research at Zenith Investment Partners (Zenith) said “I would hazard a guess that if you went back 12 months, not many people would have predicted results like this.”

International Shares is the largest sector review that Zenith undertakes.  Zenith’s 2013 International Shares review includes Global (unhedged and hedged), Global Emerging Markets, Global Small Cap, Country and Regional funds (Asia ex Japan), Global Listed Commodities, Global Private Equity.  The sector review also considers the key issues likely to face the asset class in the coming years.

“The impact of globalisation continues to influence the way companies structure their businesses and the way investment managers research and assess the likely success of those structures.  Increasingly, companies have sought to expand or develop their operations by targeting exposure to the thematic of changing global demographics – specifically, changing consumer preferences and rising wealth of the urban middle class within emerging market economies”.

“We think this is only going to become more pronounced.  Going back five or ten years, the level of company reporting on where revenues were sourced from was limited.  Now, it has almost become standard.  It goes without saying, where a company is listed is becoming less and less relevant.  It is all about where revenue and revenue growth is sourced from.”

“Overall, managers have generally fared well.   Within emerging markets, while an annual index return of just over 10% is nothing to be sneezed at, the difference in returns versus the global index certainly begs the question why?”  Managers covered in the review consistently pointed to the managed slowdown of economic growth in China, high wage growth in a number of emerging market economies and high inflation all being contributors to the relative underperformance”.

“On the positive side of things, managers also noted that the sector maintains a number of attractive characteristics.  For example, growth rates generally in excess of those for developed markets, ample room to implement fiscal and monetary stimulus if required, significantly lower levels of debt than many developed markets, and attractive valuations.”

“Currency has also been a big contributor to a client’s overall return.  The difference in the one year return (ending 30 September 2013) between hedged and unhedged versions of the MSCI World ex Australia index was 8.7% – to the benefit of the unhedged investor.  While the $A has certainly declined over the last 12 months, if you consider the level of the $A in terms of long run purchasing power parity, valuation continues to remains on the high side.  While we certainly don’t advocate investors making active currency decisions based on near-term currency predictions,  clearly there are risks over the short-term given the volatility of the $A.”

Zenith’s International Shares Sector Review represents the largest sector review undertaken by Zenith.  Of the 101 global, regional and specialist funds that took part in Zenith’s International Shares Sector Review, 16 funds achieved Zenith’s top rating.

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Zenith Senior Investment Analyst Andrew Yap said, “Zenith assigned a greater number of ratings across the Diversified sector in this review than in previous years. This coincided with the emergence of further quality offerings within each of our ‘Real Return’, ‘Single-Manager’ and ‘Multi-Manager’ categories.”

“Zenith attributes the continued growth in the number of strategies offered across this sector to a refocusing of business priorities, increased investor demand for tailored multi-asset strategies, and further legislative burden”.

When asked about changes Zenith had seen in the sector Yap said “Market conditions have further evolved since Zenith’s 2012 Review. Notwithstanding the challenges that continue to face many global economies, sentiment has broadly improved, and along with this volatility has moderated.”

“Zenith attributes this market dynamic to the significant fiscal programs and less traditional monetary policies pursued by governments and central authorities in an effort to restore investor confidence.”

Yap added, “These stimulatory market conditions are however posing numerous challenges for sector participants, and by consequence, Zenith has observed a number of developments across this sector”.

A summary of the key developments is provided below:

• Changes in Strategic Asset Allocation (SAA) are becoming more frequent and meaningful. Such change appears to be in contrast with the longer-term capital markets assumptions upon which SAA’s have traditionally been founded.

• Investment managers are finding it more difficult to identify large directional trade ideas, an area that has proven particularly fruitful in recent years. This raises questions as to whether sector participants will be able to generate similar returns in the years ahead.

• Sector participants are assigning greater resources to the identification of relative-value trade opportunities. This coincides with enhancements made to models which seek to quantify market imbalances owing to sentiment and other idiosyncratic factors.

• In an effort to enhance portfolio efficiency, a growing number of investment managers have sought to assign greater weights to discrete investment strategies such as smart beta.

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Scott Tully

Colonial First State’s FirstChoice Multi-Index funds have been awarded a ‘Recommended’ rating from Zenith Investment Partners.

Zenith described CFS’ FirstChoice Multi-Index funds as ‘a compelling offering for investors seeking a low cost exposure to the diversified sector’.

Zenith also cited their high regard for the FirstChoice Investments team responsible for managing the FirstChoice Multi-Index funds; in particular Scott Tully and Peter Dymond who Zenith believes are ‘key to the continued success of the Multi-Index funds’.

Head of FirstChoice Investments for Colonial First State, Scott Tully, said “We are very pleased to receive a ‘Recommended’ rating from Zenith for the FirstChoice Multi-Index funds.  We introduced FirstChoice Multi-Index to the market to provide investors with access to good value, diversified portfolios using innovative investment strategies.”

“The combination of Colonial First State and Realindex Investments has generated great returns for our investors since FirstChoice Multi-Index was launched in 2009,” said Mr Tully.

The interactive relationship with investment consultant Mercer enables the FirstChoice Investments team to identify value-add opportunities and ensures the portfolios are comprised of the most compelling strategies to meet their investment objectives was noted by Zenith in their review.

The CFS FirstChoice Multi-Index funds currently have over $3 billion in funds under management.  The annualised, since inception performance (as at 30 September 2013)* of the headline FirstChoice Multi-Index funds recommended by Zenith are as follows:

• FirstChoice Wholesale Multi-Index Balanced:  11.58%pa
• FirstChoice Wholesale Multi-Index Conservative:  7.85%pa
• FirstChoice Wholesale Multi-Index Diversified:  14.44%pa

The Colonial First State FirstChoice Investments team manages portfolios that in total exceed $25 billion of funds under management on behalf of 600,000 investors.  The team has developed a range of innovative investment strategies over the last decade including the CFS FirstChoice Multi-Index funds.

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