Researcher Zenith recommends active management

Another research house has come out in favour of active management in the current financial environment.

The recommendation came from Zenith Investment Partners following its Australian shares large cap sector review, which screened 152 funds and produced a recommended list of 35 funds.

“Over the past 12 months, 91 of the total 138 large capitalisation funds on the Zenith database have outperformed the benchmark (net of fees), which is a 65 per cent outperformance rate,” said David Smythe, director, Zenith.

“In Zenith’s opinion now is not the time to be abandoning active management with the current and foreseeable market conditions set to favour stock-picking skill.”

Smythe said that while margins will find protection in the low cost of index funds and exchange-traded funds, exclusively using these types of products was not in the best interests of investors “particularly during bear market conditions where avoiding the ‘blow-ups’ and finding quality companies should bear fruit”.

He said investors should maintain a diversified portfolio of Australian equity large cap funds and “stage any new investment in the asset class in order to smooth potential ongoing volatility”.

Zenith noted the current price/earnings (P/E) ratio of the S&P/ASX 300 Accumulation is sitting at approximately 10 times, “just shy of two standard deviations from the 20-year historical average and the lowest witnessed since the last recession in the early 1990s”.

“While valuations appear attractive, there are a range of risks operating beneath the surface,” Smythe said.

In the review process, Zenith removed 14 funds, including Challenger (excluding its Income Fund), BT and PM Capital. Fifteen funds were added, including Blackrock, Bennelong and Solaris, and four funds had their ratings changed.

Zenith’s recommendation follows earlier agreement from research houses van Eyk Research and Morningstar that active management in a volatile market has the potential to deliver better returns after fees than index funds.

Stephen van Eyk of van Eyk told a conference in March this year that active managers will be able to take advantage of the share market volatility that will be present in future to increase returns, warning investors against indexing in the current market.

Van Eyk said, as a result, his research house has reverted from a core of index funds with active satellites to a core of active managers with index satellites.