Aussie broad caps kick small/mids off their pedestal

Australian broad caps have kicked Aussie small/mid caps off their pedestal, with just over a third of funds in the Australian Core Strategies Equity – Australia sector rated in the top two Crowns in the bi-annual Crown Ratings recalculations.

Of the 199 funds that were rated, 27 were awarded a five-Crown rating, and 34 were awarded a four-Crown rating, as compared to 22 that were given a five-Crown rating and the 37 that were given a four-Crown rating in the last calculation.

Four Macquarie funds in the Australian equity sector maintained their five-Crown rating from the previous calculations and two BlackRock funds increased their rating from four to five.

Bennelong Australian Equities received a five-Crown rating, up from four at the last calculation, with fund manager Mark East attributing good performance to a selective portfolio focused on good quality growth companies.

While the manager believes that’s where reliable returns lie, he said he’s looking to strong international companies too.

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“One area where we do think there are good opportunities is in a number of strong global franchises, where the company is leveraging valuable intellectual property, a brand or some other competitive advantage into profitable growth offshore,” he said. “These companies should continue to compound earnings quite nicely.”

Head of investment strategy and chief economist at AMP Capital, Shane Oliver, said the Australian share market was lifting performance, and given it had “a fairly soft patch” last year and early this year, any comparisons would look quite good off the back of that.

“You’re coming from a weak point, whereas most of the global market were a lot stronger through much of last year, so it looks good” said Oliver.

Oliver said another factor behind the good performance of the Australian share market was the room in the market for fund managers to take advantage of active management and add value.

“When it comes to Australian shares, there’s less analysts pouring through it, and while there’s been an increase in the number of fund managers, it’s nothing like the numbers pouring through the US,” he said.

While Australian equities had the highest number of four and five-Crown rated funds, fixed interest assets proved hefty contenders with the Diversified Credit sector bringing in the highest percentage of funds in the top two Crowns.

A whopping 59.50 per cent of the funds in the sector were awarded four and five-Crown ratings, with nine funds awarded a five-Crown rating, and seven of which achieved the same rating at the last calculation.

The ACS Equity – Australian Small/Mid Caps sector also proved it’s still a heavyweight with the second highest percentage (47.8 per cent) of funds in the top two Crowns, 14 of which were five-Crown rated funds and 19 were four-Crown rated funds.

While the global equity sector saw the largest influx of new funds, it’s also the worst performing sector, with over half of funds in the sector achieving only a one or two-Crown rating.

Oliver said that while Australian share managers find it easy to add value in Australian shares, they find it quite difficult to do the same in the global share market.

“That’s largely because there’s so many analysts and fund managers pouring over global shares, particularly US and Eurozone shares,” he said. “You’re better off having your money in the S&P index or ETFs, rather than try to pick stocks in that market because it is so over-analysed, it’s very hard to find value.”

Oliver said this posed an opportunity for fund managers to use their active management skills in the Australian share market and use a passive strategy in the US share market.

Fund managers could also see opportunity in the Mixed Asset – Flexible sector, with four new entrants calling the sector home, but over third of these funds were award one and two-Crown ratings.

Table 1: Number of four and five-Crown rated funds in sectors