Health, IT stocks set to continue to drive positive returns: Mercer

Technology, healthcare and consumer discretionary stocks may continue to shine as COVID-19 accelerates long-term trends.

In the year to September, exposures to healthcare, IT and consumer discretionary stocks were the main drivers of positive returns. Picture: AFP

Technology, healthcare and consumer discretionary stocks may continue to shine as COVID-19 accelerates long-term trends and near-zero interest rates boost the value of future cashflows, but now is not the time to give up on value stocks either, according to Mercer.

“Healthcare and IT stocks have been the winners through COVID-19 as we’ve seen quality and growth outperform value,” said Ronan McCabe, Mercer’s head of portfolio management.

“Typically, in a recession we would expect value to perform better, but the pandemic was quite different to the normal catalysts and banks don’t do as well when interest rates are low. However, investors should seek to retain value exposure in their portfolios through the cycle.”

While record-low interest rates have boosted the market valuation of quality growth stocks, Mr McCabe said it was “still prudent” for investors to have some value stocks in their portfolios.

“You probably need interest rates to move up for value to kick in, but it can play a defensive role.”

It comes as Mercer’s Australian shares investment manager performance survey for the September quarter shows active fund managers outperformed for a second quarter running.

The median fund beat the S&P/ASX 300 Index by 0.6 per cent in the quarter, while the top 25 per cent of funds beat the benchmark by 1.9 per cent.

In the year to September, the top quartile of funds beat the benchmark by 4.6 per cent.

The top five funds for the year to September 30 were Hyperion Australian Growth, QVG Long Short, Platypus Australian Equities, ECP Asset Management All Cap and Bennelong Core Equities.

Exposures to healthcare, IT and consumer discretionary stocks were the main drivers of positive returns while the worst performers suffered from financials, real estate or energy exposures.

“In what has been a turbulent nine months, IT has continued to outperform the broad market,” Mr McCabe said. “Long-term secular trends that had been expected to play out over the next number of years have been accelerated since COVID-19, such as e-commerce, remote working and data warehouses performed well, as opposed to physical retail.

“Healthcare and tech sector allocations have remained the key contributors to positive performance in the past year, with energy and financials as the major headwinds. Investment managers that had exposures to high growth and quality companies did better than value-based managers.”

Meanwhile the performance gap between the upper and lower-quartile managers continued to widen due to the divergence in performance of value and growth stocks in particular.

“We believe that this continues to highlight the importance of fund manager diversification when selecting a portfolio of active managers,” Mr McCabe said.

Looking the ahead, he said the US elections in early November may cause volatility.

He said the median Australian shares fund tends to outperform its benchmark three months before and three months after the election.