FMOTY 2023: Spotlight on Aussie Large Cap Equities
As the Fund Manager of the Year Awards nears on 22 June, Money Management spoke to the Australian Large Cap Equity Fund finalists.
The five finalists in the category were:
- Allan Gray Australia Equity Fund
- Dimensional Australian Value Trust
- DNR Capital Australian Equities High Conviction Portfolio
- Lazard Select Australian Equity Fund (W Class)
- Quest Australian Equities Concentrated Portfolio SMA
Click here to view the full list of finalists
In their respective strategies, fund managers observed strong performance ahead of ASX benchmarks. Moreover, Australian large-cap shares underpinned asset diversification looking forward.
According to Julian Morrison, investment specialist at Allan Gray, the Allan Gray Australia Equity Fund’s contrarian investment approach was the key to its success.
“We believe a unique investment approach that is difficult to replicate, and consistency in its application, has stood us in good stead with investors and can lead to long-term outperformance potential,” he said.
The fund performed ahead of the S&P/ASX 300 benchmark over one year and three years as at 30 April 2023.
“The fund also outperformed the S&P/ASX 300 Accumulation Index over 10 years, 15 years and since inception 17 years ago. Notwithstanding that, long-term performance in the future is the most important thing,” Morrison added.
The fund management firm was avoiding sectors where high valuations suggested poor returns in the future.
“The positive news is that the gap between the overpriced and underpriced shares has become very wide again, creating attractive opportunities for active managers to position for future outperformance,” he said.
Rob Osborn, portfolio manager and analyst at Lazard Asset Management, described that the Lazard Select Australian Equity Fund (W Class) was rewarded for its consistent value approach.
The team of nine portfolio managers and research analysts had been managing Australian Equity value strategies for more than 20 years.
“Focusing on core or mid-cycle earnings helps mitigate risks capitalising inflated earnings and it also enables us to look through a temporary dip in earnings that may present an opportunity,” he said.
As of 30 April 2023, the fund was 5.8 per cent ahead of the S&P/ASX 200 on a one-year basis. It was also 5.9 per cent per annum ahead of the benchmark on a three-year basis.
“The early 2020s is seeing the establishment of a new investment regime which will likely require a different approach. As with all secular changes, the market has only begun to adjust to the new environment. This delayed market recognition is providing significant opportunities,” Osborn described.
The DNR Capital Australian Equities High Conviction Portfolio had a long tenure in the market, having provided strong returns for its investors for over 20 years.
“By applying our investment philosophy and process, along with a very stable team, this delivered particularly strong results in 2022 by continuing to invest in a balanced portfolio of high quality companies and attractive valuations,” said Jamie Nicol, chief investment officer and portfolio manager.
The portfolio’s three-year returns to April 2023 outperformed its benchmark by 6.79 per cent per annum.
“This period captures the volatility of COVID-19 onset, the boom in growth stocks as interest rates fell to zero and the post-lockdown value rotation as inflation drove up interest rates, sweeping away more speculative stocks,” Nicol observed.
The CIO was confident in Australia’s positioning despite high inflationary pressures across the globe. Increased demand for key resources to fuel China’s reopening and development was crucial.
“We also observe pockets of excessive valuations in longer duration and technology stocks, but also compelling valuations among select out of favour but high-quality franchises,” he added.
According to Bhanu Singh, Australian chief executive and head of Asia-Pacific portfolio management at Dimensional Fund Advisors, the Dimensional Australian Value Trust had outperformed the broad Australian markets since its inception in 1999 as part of the firm’s process of seeking to beat markets without trying to outguess them.
"We systematically target the long-term drivers of higher expected returns identified by academic research. In equities, we believe the size, relative price and profitability of a company drives returns,” he commented.
The trust delivered a 7.92 per cent return in the 2022 calendar year, contrasting a negative 1.77 per cent return for the S&P/ASX 300. Across three years, it delivered an annualised return of 23.13 per cent compared to the index’s 16.59 per cent.
“We don’t tactically shift our asset allocation. What tends to move markets most is things investors didn’t expect,” Singh said.
“The answer to that is broad diversification and staying disciplined within your chosen asset allocation. Having an allocation to Australian large caps is obviously part of that.”
Chris Cahill, founding director and portfolio manager at Quest Asset Partners, attributed the success of the Quest Australian Equities Concentrated Portfolio SMA to its consistency.
The investment team had remained almost unchanged for almost 20 years and the portfolio was limited to 35 stocks.
“We are fundamental stock pickers who search for certain attributes in our investee businesses with emphasis on cash flow, balance sheet and risk,” he told Money Management.
Since inception in 2005, the portfolio returned 11.9 per cent per annum at 31 March 2023, compared to the ASX 300’s annualised return of 7.5 per cent.
“Quest returns are strong compared to competitors given the risk discipline that we have maintained since inception. Quest is top quartile over three, five and 10 years,” Cahill continued.
Understanding the ability to price, the cost base, and market positioning was important to their investment process.
“There are always opportunities in the market regardless of the macro,” he added.
Winners of the 2023 Fund Manager of the Year Awards will be announced on Thursday 22 June 2023 at a black-tie gala awards ceremony at The Star in Sydney.
AUTHOR
Jasmine Siljic
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