August research round-up

PortfolioConstruction Forum presents the most recent projects conducted by major funds research houses over the past month.

Lonsec

Lonsec has been awarded the Money Management Fund Ratings House of the Year Award for the second year running.

Presented at the 2011 PortfolioConstruction Forum Conference, the awards survey the views of financial planning dealer groups and fund managers.

Lonsec topped the ratings in both constituencies.

The rise of the core/satellite approach to building portfolios, and the rise of SMAs, is driving an increase in the number of Australian equity concentrated funds, according to Lonsec in its latest review of the sector.

Most concentrated managers are running strategies that employ a similar style, philosophy, and process to their traditional core offering – with the key difference being in the portfolio construction process, Lonsec found.

“Typically, this difference is the manager constructing a ‘best ideas’ portfolio,” Lonsec explained. However, the majority of managers in the sector struggled to significantly grow funds under management (FUM) over the past year. Lonsec awarded a Highly Recommended rating to two funds – the Hyperion Australian Growth Companies Fund and Tyndall Australian Share Wholesale Portfolio.  

Specialist emerging market managers with dedicated resources and tailored investment approaches should be preferred for emerging markets, according to Lonsec.

Despite the growing global awareness of emerging markets as a source of potential return, the sector remains a more inefficient research pool than developed markets, particularly for those managers comfortable investing in the less heavily researched mid cap stocks.

“This gives fundamental, active managers with well formulated investment research processes a greater opportunity to exploit insights gained from direct company contact and the research effort in general,” Lonsec argues, adding it prefers an active investment approach when allocating to emerging markets.

Standard & Poor's Fund Services

Standard & Poor’s is launching its international equities research capability into the Australian market in September.  The research incorporates both qualitative and quantitative research on selected global equities, including S&P analysis on valuation, risk, and cross-asset analytics. 

S&P Fund Services has announced the finalists in the 2011 S&P Fund Awards. The awards, including 10 sectors plus the overall Product Distributor of the Year and Fund Manager of the Year, are based on a qualitative assessment of specific investment-management capabilities within a sector, rather than being based on past performance of individual funds.

Van Eyk

Fund managers with an urge to merge need to tread carefully, according to van Eyk in a recent discussion piece.
“Like the merger of any two corporate entities, bringing together two or more investment teams and structures poses challenges and fund managers don’t always get it right,” van Eyk notes.

The type of consolidation that can enhance a manager’s ability to outperform the benchmark includes a merger of two boutique firms, which can result in increased resources, better access to sell side analysts and company management, and reduce the time each investment professional spends on non-investment tasks.

Less favourable consolidation activity is driven by economies of scale, or distribution or cost synergies, van Eyk writes.

“Relatively large investment teams with sizable funds under management may be merged. These types of consolidations are often, but not always, detrimental to the ability of the combined investment team to outperform its benchmark,” van Eyk warns, citing a larger pool of assets reducing the ability to be nimble, demotivation amongst the investment professionals, and changed stock and sector responsibilities reducing stock picking ability.

The fundamental drivers remain in place for the gold price to go higher, according to Heuristic Investment Systems director Damien Hennessy.

A consultant to van Eyk Research, Hennessy believes the factors that have driven the price of gold so far are still in place – namely, low interest rates in most of the world, the threat of an inflation breakout and fears of further currency depreciation.

A possible but unlikely threat to the gold price could come from a severe global recession which might see investors revert to old habits and pour money back into the US dollar because of its traditional safe haven status and the lack of an alternative if all economies take a dive, Hennessy warns.

He says a more likely scenario that would threaten gold would be if the US economy improved to the extent that the level of interest rates normalised, but that was still unlikely – at least in the short to medium term, he said.

Zenith Investment Partners

Zenith Investment Partners has been added to the research panel of Melbourne-based financial advisory group, RetireCare Personal Wealth Management, and has been appointed primary research provider for People’s Choice Credit Union.

Now more than ever, is the time to consider increasing allocations to global long/short funds, according to Zenith, following its latest review of the sector. "The last 20 years have been extremely favourable for global equity markets, with many investors getting an equity beta free ride," the house writes.

Going forward, however, a significant derating of the equity markets and a rising interest rate environment will erode market beta, Zenith warns. "Investors need a fund that can continue to add alpha by buying high conviction stocks and selling short those stocks likely to fall."