FMOTY 2023: Spotlight on passive equities

Ahead of the 2023 Fund Manager of the Year Awards on 22 June, Money Management spoke to finalists for Passive - Equity Fund of the Year.

The finalists in the category are:

• Betashares Australia 200 ETF
• iShares Core S&P/ASX 200 ETF
• SPDR S&P World ex Australia Carbon Control Fund
• VanEck Australian Equal Weight ETF
• Vanguard US Total Market Shares Index ETF

Click here to view the full list of finalists.

These nominees came out on top even as the Australian equities market performed relatively well compared to its global peers, returning 2.71 per cent year-to-date to 31 May 2023.

Arian Neiron, CEO and managing director, Asia-Pacific, VanEck, noted that its Australian equities fund had outperformed the S&P/ASX 200 across every trailing time period to 31 May 2023, including outperforming by 1.04 per over 1 month and 3.62 per cent over 1 year.

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“Australian equities have shown resilience this year. However, we see interest rates staying higher for longer, which will expand the pockets of pain we’re seeing now. While we think Australia will be the lucky country again, avoiding a recession, this is an environment where investors will need to take a diversified approach,” he observed.

Thong Nguyen, head of equities at Betashares, agreed the local market had performed well compared to other global developed markets, thanks in part to high commodity prices and a less hawkish Reserve Bank. 

“Our A200 ETF continues to see strong flows from investors, receiving in excess of $1 billion in assets over the last 18 months, as they switch their core Australian shares exposure to a more cost-effective fund,” he told Money Management.

“In terms of fund performance, A200 has returned 11.71 per cent p.a. and 7.60 per cent p.a. over the last 3- and 5-year time horizons respectively to the end of 31 May 2023, while paying investors a dividend yield of 6.47 per cent over the last 12 months.”

Their outlook for Australian equities hinged on whether policy makers could navigate a soft landing while juggling the lagged effects from policy tightening and the challenges around stubbornly sticky inflation. 

Nyugen added: “There are several headwinds facing Australian investors as the late cycle continues, the risks around a global recession and how a slowdown in economic activity will impact our more resource-based economy as well as a slowdown in housing activity. On the flip side, China has shifted to stimulus mode as it seeks to spur growth, valuations remain near historical long-term averages, peak inflation has passed, and terminal rates are nearing.”

Kathleen Gallagher, head of SPDR ETFs Australia and head of model portfolios EMEA & APAC, highlighted how the SPDR S&P World ex Australia Carbon Control Fund (WXOZ) reduces concentration risk by accessing approximately 1,000 companies and industries not accessible in Australia while minimizing the weighted average carbon intensity.

“With a backdrop of a difficult, and volatile global market, [the Fund] has been performing strongly, achieving a YTD total return of 15 per cent,” she said. 

However, she foresaw some rough waters ahead for the market.

Gallagher said: “The global investment market is likely to continue facing significant uncertainty and headwinds through 2023 and into 2024. For that reason, diversifying into a broad-based ETF, like the SPDR S&P World ex Australia Carbon Control Fund, is likely to continue being important.”

Vanguard’s US Total Market Shares Index ETF, too, provided exposure to over 3,800 securities, providing broader diversification and depth of coverage, explained Duncan Burns, CIO, Vanguard Asia Pacific.

“The ETF has performed in line with its benchmark with a long track record of extremely tight tracking, as a good quality index fund should. This tight tracking has meant that an Australian dollar investor in this fund has received a return of over 13 per cent for the last 12 months and over 15 per cent p.a. for the last 10 years (as at the end of May 2023),” he told Money Management. 

Looking ahead, Vanguard’s Capital Markets Model projected 10-year annualised returns for US equities in the range of 4.1 per cent to 6.1 per cent, with 17.0 per cent median volatility.

“If you hold VTS, you will grow with the American market. We believe that for most investors, the best chance of successful investing over the long-term boils down to a simple strategy - establish your long-term goals, diversify your portfolio in line with those goals aligned to your appetite for risk, keep an eye on costs, and maintain the discipline to stick to your strategy over the long term,” Burns said.