What has hurt value funds during the pandemic?
Value funds have suffered a “torrid time” for the past decade but a range of factors during the pandemic have caused them to suffer even worse than usual.
According to Morningstar, value funds had been hindered in recent years by asset price inflation which had left only a small hunting ground for them to find value stocks. This worsened during the COVID-19 pandemic with value funds experiencing higher volatility and higher downside capture than their growth counterparts.
“While value’s underperformance over the first half of 2020 is disappointing, it is not unexplainable,” the data provider said. “Both the healthcare and technology stocks have long been favoured domains of growth managers, with many stocks priced out of reach of the typical value manager.
“Meanwhile, value has become increasingly concentrated in fewer areas over recent years – most notably in deep cyclicals such as the energy sector and leveraged businesses like financials. These two areas are highly sensitive to real economic activity and have been most exposed to the lockdowns aimed at supressing the spread of the virus.”
As well as this, it had been challenged by the unprecedented monetary stimulus initiated by central banks worldwide which was showing no signs of ending soon.
According to FE Analytics, within the Australian Core Strategies universe, there were 14 funds within the 228 funds in the Australian equity sector which identified themselves as being ‘value’ funds.
Since the start of the year to 31 August, only two of these funds had positive returns over the period. These were the Ganes Focused Value and the Prime Value Opportunities funds which had returned 2.14% and 1.8% respectively.
The Australian equity sector had lost, on average, 5.9% over the same period and eight of the value funds had performed worse than this. The worst-performing fund was the AXA Wholesale Australian Equity Value which lost 16.4% over the period.
However, Morningstar was reluctant to write-off the asset class as it felt cyclicals could yet see a “massive rally” which would boost value funds.
“As the economic downturn has been sharp and deep, the rebound could equally surprise. The sugar-hit of massive fiscal stimulus may gain more traction in the event of a breakthrough vaccine or therapeutic. In such an event, deep cyclicals could rally hard while any emergence of inflationary pressure as a consequence of all this money printing could see interest rates rise and apply the handbrake on growth’s re-rating.”
AUTHOR
Laura Dew
Recommended for you
Lonsec and SQM Research have highlighted manager selection as a crucial risk for financial advisers when it comes to private market investments, particularly due to the clear performance dispersion.
Macquarie Asset Management has indicated its desire to commit the fast-growing wealth business in Australia by divesting part of its public investment business to Japanese investment bank Nomura.
Australia’s “sophisticated” financial services industry is a magnet for offshore fund managers, according to a global firm.
The latest Morningstar asset manager survey believes ETF providers are likely to retain the market share they have gained from active managers.
