Who underperformed in the Aussie equities space?

An Islamic fund, a bear hedge fund, and an Australian value wholesale fund were the three worst performing Australian equity funds over a three-year period, but prominent firms such as Colonial First State (CFS) also underperformed, according to FE Analytics.

The data showed that Islamic fund, Crescent Australian Equity Wholesale, was the worst performing fund over a three-year period, showing a loss of -4.64 per cent.

According to Crescent Wealth’s website the four principles of Islamic investing included:

• Avoiding the payment or receipt of interest or ‘riba’;
• Avoiding uncertainty where everyone participating in a financial transaction must be sufficiently informed and all fundamental terms such as price or quantity must be determined at the outset;
• Avoiding relying on speculation to produce a return. Normal commercial risk-taking and related speculation is otherwise permitted; and
• Investing ethically, which filters out companies that engage in gambling, tobacco, adult materials, alcohol, and weapons.

The second worst performer was BetaShares Australian Equities Bear Hedge, with the $56.3 million fund showing an annualised loss of -4.56 per cent over three years, and -6.14 per cent over one year.

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However, the fund said it aimed to provide investors with an avenue to profit from or to protect against a declining Australian share market, and looked to generate returns that were negatively correlated to the returns of the share market, as measured by the S&P/ASX200 accumulation index.

The fund aimed to give access to short exposures to the market and was designed to go up when the market goes down and vice versa, and hedge portfolios against falling markets using capital.

Sifting through the list of equity funds in Australia also uncovered some prominent funds of considerable size that had underperformed compared to the S&P/ASX300 as well as the Australian equities sector benchmark.

CFS’ MIF Imputation fund, which is worth almost $1.4 billion, showed an annualised return of 2.12 per cent over three years, compared to 5.12 per cent on the S&P/ASX300 index, and 4.63 per cent in the Australian equities sector.

The fund’s one-year performance was considerably below both benchmarks. While the sector benchmark stood at 7.16 per cent and the S&P/ASX300 benchmark was at 7.03 per cent, the CFS fund returned 0.33 per cent.

CFS Global Asset Management global head of investment specialists, James Crawford, said performance in the last 12 months for this particular growth style product had underperformed, adding that it was one of the worst years.

“As for our growth style, it’s a factor tilt, if you like, towards growth, and that combined with a quality bias in the portfolio as well, which has also had a negative year,” Crawford said.

“In fact, that’s the first time in over a decade that both the growth and the quality factors or tilts have underperformed and hence that’s why that’s probably one of the worst years we’ve had in a relative sense.”

Crawford also said as a growth investor, the team invested in companies with growth opportunities that would enable these companies to reinvest capital at high rates of return.

The growth stocks can trade on higher than average price-to-earnings ratios with valuations that could be disproportionately vulnerable to rising bond yields when market expectations changed sharply.

“Growth stocks underperformed their value counterparts in the 12 months to the end of June 2017 (MSCI Australia Large Cap Growth 0.7 per cent vs value 10.9 per cent). This created a headwind for fund performance, given its growth-oriented investment style,” Crawford said.

“The divergence in performance was largely caused by a compression in the range of P/E ratios. High P/E defensive growth stocks have de-rated lower, while low P/E cyclical value stocks have re-rated higher.”

The P/E compression of growth versus value stocks was due to rising bond yields, with the yield on 10-year Australian government bonds rising from 1.99 per cent at the end of June 2016 to a peak of 2.98 per cent on 10 March 2017.

“Bond yields have rebounded on the back of rising inflation expectations and improving confidence in the global economic growth outlook,” Crawford said.

FE Analytics data also showed Perpetual Wholesale Australian returned 2.66 per cent over a three-year period, but outperformed the sector benchmark over a five-year period, with the $1.27 billion fund returning 10.6 per cent. Perpetual could not comment at this point in time.

The almost $1.8 billion Schroder Wholesale Australian Equity fund showed an annualised return of 3.53 per cent over three years, but it outperformed both benchmarks over a one-year horizon, returning 13.81 per cent.

The third worst performing fund over a three-year period was Clime Australian Value Wholesale, showing a negative return of -0.74 per cent. It returned 3.65 per cent over one year and 3.39 per cent over five years.

The firm refused to comment.