Active funds players ‘need to keep evolving’: Eley Griffiths

Active funds management is not dying and equity risk indicators suggest any sharemarket meltdown is a long way off, Eley Griffiths says.

Ben Griffiths sees plenty of upside in sharemarkets given relatively benign credit markets.

Active funds management is evolving quickly rather than dying and sharemarkets still have further upside, as equity risk indicators suggest any market melt­down is a long way off.

That is the view of Eley Griffiths managing director Ben Griffiths, who has worked in markets for decades and is now steering his firm further into quantitative analysis and data.

He believes it is imperative the funds management industry adapts and evolves to use more real-time and other data, and clearer models in areas such as screening companies for environmental, social and governance (ESG) factors.

“Active management is evolving, not dying,” Mr Griffiths said. “It’s moving very quickly, the tolerance for poor governance, the tolerance for underperformance is thinning out.

“This (quantitative analysis) is like an Aladdin’s box, it just opened up and there were all sorts of things we thought we could do.”

The small and emerging companies firm, which manages almost $2bn, has hired UBS quantitative analyst and strategy operative Pieter Stoltz, who starts on Monday. The appointment is aimed at boosting Eley Griffiths’ investment methodologies, more closely analysing data and utilising factor investing.

Mr Griffiths remains positive on markets given the recent domestic earnings season, that investors are flush with capital and central banks and governments are supporting Covid-19-affected economies.

Also giving him confidence is the frenetic pace of mergers and acquisitions, and that the market for initial public offerings remains healthy.

“Animal spirits are alive. It tells me that markets are healthy, and it tells me that interest is high,” Mr Griffiths said.

“The quality of the (IPO) businesses that we look at is, in the main, pretty good. The valuations are not excessive … that also tells you we are probably mid cycle for where the market’s going to finish.

“There’s a pretty powerful cocktail there that tells me equities will continue to move upwards.”

Ben Griffiths, principal at Eley Griffiths.

The S&P/ASX 200 index has chalked up 11 straight months of gains, but the small capitalisation index remains lower than its record highs. Commenting on the August profit season, Mr Griffiths said investors were looking through Covid-19-related issues for companies like Qantas and Flight Centre.

“A lot of the negative news has been very fully discounted in share prices,” he said. “Share ­prices can’t take any more bad news. In Australia, we’ve got to get through lockdown and through herd immunity.”

Investors are debating the timing of the US Federal Reserve’s pulling back of stimulatory money policies, and whether Australia will endure another recession due to prolonged lockdowns in Sydney and Melbourne. The domestic economy expanded by 0.7 per cent in the three months to June 30, allaying fears that the nation may already be in recession.

Mr Griffiths sees plenty of upside in sharemarkets given relatively benign credit markets and his tracking of equity risk premiums, which reflect whether investors are being compensated enough to invest in shares.

“There is a decent margin of safety. The current equity risk premium for the US is about 6 per cent, and in Australia about 8 per cent,” he said. “Most substantial market meltdowns and collapses historically have occurred when the equity risk premium is 2.5 per cent to 3 per cent (in the US).”

On introducing more quantitative methods and analysis to the firm, Mr Griffiths said the decision centred on being able to better utilise real-time data, more granularly looking at index composition, back testing ideas more reliably and looking at whether factor investing could boost ­returns.

Factor investing is an approach used by managers that selects or screens stocks based on specific drivers or attributes such as leverage, earnings revision, volatility and growth.

Investment giant BlackRock has previously estimated the factor industry would expand to $US3.4 trillion ($4.6 trillion) by 2022, up from is estimated at $US1.9 trillion in 2017.

Mr Griffiths sees merit in looking at earnings revisions and dispersion more closely.

“Companies that have a high level of earnings dispersion therefore might reasonably be expected to have volatile outcomes and therefore will have difficulties in outperforming,” he said.

The firm will also draw on Mr Stoltz to more closely analyse ESG data in a quantitative way to score and screen companies through a formal and objective method.

“(ESG) is not going anywhere but it is only going to become a bigger part of everyone’s life, and the key to ESG investing, the real skill, is being able to screen out ­potential disasters,” Mr Griffiths said. “That’s the guts and the crux of ESG investing.

“There’s so much green washing that goes on … We want to be well clear of any allegations that we are just informally green washing things, we want to be quite puritan about it.”

The Eley Griffiths small companies fund returned 30.9 per cent in the year to August 31, but 11.4 per cent per annum over three years. The firm’s emerging companies fund has returned 42.6 per cent over one year, and 23.8 per cent per annum over three years.

While they are not permitted on the ASX, the prevalence of Special Purpose Acquisition Companies in markets offshore including the US is cause for some caution, according to Mr Griffiths.

“Some SPACs will find good assets and they’ll be suitably rewarded, but there’ll be a tail of pretty miserable outcomes and a lot of them will eventually be wound up,” he said.