Active fund managers clean up amid chaos

The most extraordinary year for financial markets in living memory was a good one for active ­equity fund managers.

Michael Goldberg is an executive director of funds management firm Collins St Asset Management. Picture: Chaya Goldberg

The most extraordinary year for financial markets in living memory was a good one for active ­equity fund managers, particularly those who were wary of economic risk before COVID-19 struck and also took the opportunity to add structural-growth and cyclic exposures after the sell-off.

Passive funds made subpar ­returns in the year to the end of December as the S&P/ASX 300 index fell 1.2 per cent and dividends were crimped by a combination of recession and the regulation of banking sector payouts. But the top 10 active equity funds returned 24 per cent on ­average, according to Mercer’s closely watched Australian Shares Investment Manager Performance Survey released on Tuesday.

But it was also a year in which unprecedented fiscal and monetary policy stimulus trumped economic concerns and vaccine developments, and the US election outcome added to the market’s upward momentum.

Whereas long-short funds — better known for their hedge fund strategies — topped the league tables in the first half, the long-only funds excelled in the second half, with “buy and hold” strategies generating the best ­returns.

Collins Street Value Fund co-founder and managing director, Michael Goldberg — who’s fund topped the Mercer tables with returns of 43.6 per cent for 2020 and 32.2 per cent for the December quarter — says the concentrated portfolio allowed by his investment mandate, combined with a fortuitous decision to raise cash levels in 2019 and then buy on dips, set the fund up for its ­performance.

“We’re very fortunate that we have a concentrated mandate and that our clients have had ­patience and faith in our best ideas, but our cash reserve also helped,” Mr Goldberg told The Australian.

“I don’t want to pretend for a second that we picked COVID-19, but we had concerns about the broader market because the market was expensive and it was getting harder to find stocks that were attractive and cheap, so we had built up a cash position of about 35 per cent by the time COVID hit.

“But the real key was being able to allocate that capital when the market was panicking.

“I think we did more buying in 2020 than we did in the two or three years before that.”

After the index dived as much as 39 per cent from a record high to a 6½-year low in the space of just five weeks — marking its sharpest sell-off since the 1987 crash — Collins Street waded into a couple of companies via heavily discounted equity capital raisings in March and April and then continued buying in the following months, adding about seven new positions in total.

Collins Street’s performance was also enhanced by its holding of gold stocks — where profits were subsequently booked — and the stellar December-quarter jump in the uranium sector.

But as a value fund manager, Mr Goldberg shuns the high-flying technology sector.

“From a valuation perspective, it’s hard to get a sense of what Afterpay is worth, even if it succeeds in everything it’s seeking to achieve and I’m a bit nervous about these prices,” he said.

However, the surge in Afterpay last year was a key performance driver for Hyperion Australian Growth Fund, which returned 33.7 per cent in 2020 and 16.3 per cent in the December quarter.

Hyperion bought Afterpay shares at about $50 a share after realising that the “buy now, pay later” operator would survive the looming recession and assessing regulatory risk as minimal, while Tencent’s purchase of a substantial shareholding was seen as validating the investment case.

The fund bought more Afterpay shares near $70 when it formed the view that PayPal’s BNPL offering would not disrupt Afterpay since it was “effectively a marketing engine” for retailers.

“COVID-19 was a watershed moment for us because all those structural themes we had been talking about [were] accelerated by the containment crisis and those kinds of companies benefited,” Hyperion chief investment officer and portfolio manager Jason Orthman said.

“More modern businesses that enabled you to operate remotely and digitally tended to do well because COVID-19 and the lockdown crisis forced people to change their ways.”

Mr Orthman expects more consumers and businesses to use that technology over the next decade.

The “structural growers” also tended to outperform in a relative sense because many of the “old world” businesses relying on historical business models tended to struggle.

But Hyperion was also fortuitously positioned before COVID-19. It had removed all cyclic exposures and replaced them with “robust businesses”.

The view was that the “world’s pretty fragile” in terms of economic growth, at some stage there would be a correction or crisis, and they wanted companies that could control their own destiny.

“We had these high structural growth companies that we thought could grow in all conditions,” Mr Orthman said. The fund had also boosted its cash reserve to 14 per cent. Now it is under 3 per cent.

“When COVID-19 hit, we were really aggressive in refreshing our portfolios,” he said.

But new additions to the Australian fund were quite concentrated — just Afterpay, Domino’s Pizza and James Hardie — although it did take the opportunity to top up on Xero and WiseTech shares, which also surged from the March low in the sharemarket.

James Hardie was the only real cyclic foray for Hyperion last year after the share price more than halved.

“If you’re ever going to add cyclicality, it’s through a crisis,” Mr Orthman said.

Notwithstanding the economic rebound that has followed unprecedented fiscal and monetary policy support and the start of COVID vaccinations, he sees low economic growth, low inflation and low interest rates, in a “very competitive and disruptive world” for the next one to two decades.

“While people are hopeful of vaccines or more stimulus, you can have the market getting excited and bidding up major banks, resources or lower-quality businesses, but we believe that will be temporary, because over the long term nothing has actually changed,” he said.

Still, Tribeca Investment Partners portfolio manager Jun Bei Liu is “incredibly positive” on Australian equities this year. She anticipates a return from the index of at least 10 per cent on the back of easy monetary policy, fiscal support and an economic rebound led by the US and China.

Ms Liu’s Tribeca Alpha Plus fund returned 11.4 per cent in 2020, making it the second-highest returning long-short fund surveyed by Mercer.