Stock-pickers come out second best though Trump’s wild ride

Hedge funds were torched, and long fund managers underwhelmed, adding to the pressure stock pickers find themselves under.

Trump’s trade war has dominated the momentum for equity markets, with fundamentals thrown out the window. Picture: NCA NewsWire/Nikki Short

It was a case of the market beating Australia’s stock pickers, closing off a terrible quarter for active managers. And this is before the full brunt of Donald Trump’s trade war was felt.

The closely-watched Mercer quarterly investment performance survey highlighted the extent that Trump’s trade war has dominated the momentum for equity markets, with fundamentals thrown out the window.

But for investors, the wild ride translates to losses and sub-par investment returns across long-only funds, while hedge funds fared even worse.

The Mercer survey tracks the performance of fund managers that manage hundreds of billions of retirement savings.

The rankings are closely watched, and an out-of-cycle investment strategy or even a poor stock pick can make all the difference on how super funds allocate their mandates.

The figures for the March quarter show the benchmark S&P/ASX 200 delivered better returns than the average of long-only fund managers in both the quarter and one-year horizons.

Long-only managers on average delivered a loss of 2.9 per cent for the quarter and positive 1.9 per cent over the year to end March. The index meanwhile returned a loss of 2.8 per cent for the quarter but delivered a positive 2.8 per cent performance on the year.

Over three years, the returns between the benchmark index and average of long-only fund managers were broadly even. It was only from five-year returns that active managers started to pull away from the index.

Forager chief investment officer Steve Johnston. Picture: John Feder/The Australian.

Remember, this was the period in the lead-up to Trump kicking his own economic goal by launching the damaging “Liberation Day” trade war. The market losses in the weeks followed, heightened by Trump’s threats to sack his central bank boss Jerome Powell, are likely to mean stock pickers could also come out second-best for the June quarter. Although there could be some reprieve with Trump now starting to walk back from his Powell threats.

Hedge funds, known to charge investors a big premium for their promise of market-beating strategies, fared even worse in the near term. In the language of traders, hedge funds were simply torched during the period as their short bets soured.

Average losses among Australian hedge fund managers of 6.3 per cent over the March quarter were far deeper than the index and long-only funds. None of the hedge funds tracked by Mercer posted a positive return for the quarter, and no one beat the index.

Over the year, hedge funds returned an equally underwhelming 0.5 per cent, but outperformed both the market and long-only funds from three years with a 6.2 per cent gain.

Over five years, hedge funds averaged 17.5 per cent, outperforming both the index (13.2 per cent) and long-only funds (14.5 per cent), the Mercer figures show.

Boutiques back?

Opportunistic buyers of deep-value shares were among the few managers able to capitalise on the extreme volatility of Trump’s inauguration in January. The period also marked the rise of the boutique managers.

For the second consecutive survey, Steve Johnson’s small-cap leaning Forager Australian Value fund came out on top on the one-year returns. It was up 21.7 per cent, although delivered a loss of 0.6 per cent on the quarter.

The Collins St Value Fund beat the pack and the index with quarterly returns of 3.7 per cent. Rob Tucker’s high-conviction Chester Opportunities Fund came out second for the March quarter with 2.8 per cent.

Still, lacklustre returns across the entire market will add to the shift away from public markets. For years, big super funds have been sharply increasing fund allocations to managers overseeing unlisted assets like private credit, private equity, real estate and infrastructure for their promise of higher returns and less volatility.

However, it’s times like market meltdowns that represent a chance for stock pickers to show their worth.

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