Mercer survey offers relief for managed funds

Aided by BHP and Rio Tinto, the managed funds sector turned in a strong year in 2017. Even the worst performers made money.

The Mercer survey will be good news for a managed funds sector that’s been under siege. Pic: AFP

Australia’s legion of “long only” fund managers, traditional players who actively select stocks with a view to beating the index, got some good news with Mercer’s annual fund survey reporting managers comfortably beat the benchmark S & P/ASX 300 accumulation index.

The index (which includes dividends) rose 11.9 per cent while the median long only fund manager gained 13.8 per cent.

According to the Mercer survey, this latest result confirms a pattern, with traditional long only fund managers also beating the index over three and five years.

Certainly the figures will offer some relief to the managed funds sector which has been under siege from low-cost index funds and ETFs while also battling to justify current fee structures.

What’s more the long only sector — which is the biggest sector in the industry — also beat ethical funds which have been gaining traction in recent times and almost matched the performance of so-called long/short funds, which are managed funds which allocate a certain of money to shorting stocks.

As long only funds return 13.8 per cent, the long/short funds managed 13.9 per cent while socially responsible investment funds fell behind with a return for the year of 11.9 per cent.

The muted performance from the long/short funds suggests managers in that area are struggling with low volatility, while the weaker showing of ethical funds indicates the avoidance of miners by some of these funds would have dragged on overall performance in the 12 months to December.

Indeed the wider market over the year was very much lifted by the outstanding performance of two big mining stocks — BHP and Rio Tinto — which rose 22 per cent and 33 per cent respectively.

Other key stock contributors to both long only and index funds were CSL (up 43 per cent) and Aristocrat Leisure (up 55 per cent).

Outside the big cap stocks some of the most important positive contributors last year were IDP, a provider of international student placement services (up 58 per cent), and Reliance Worldwide, the diversified plumbing business (up 23 per cent).

Among stocks that would have dragged down performance were big cap losers such as Telstra (down 23 per cent), Brambles (down 16 per cent), and insurer QBE which was down 10 per cent (and that was before the company announced a looming $1 billion loss this week).

Mercer also split its reporting on index funds into two categories — index and “enhanced index” reflecting the evolution of the index fund industry from funds which simply mirror wider index performance towards funds which offer to capture extra value and outperform a set index through tailored investment strategies.

However, the enhanced index sector failed to “enhance” at all over the 12 months to December, with the enhanced median running exactly on par with standard index funds. The median of both categories over the 2017 calendar year was 12 per cent. Over both the three year and five-year time frames the enhanced index funds have added some value — an extra 0.1 per cent over three years and an extra 0.9 per cent over five years.

Income-oriented funds managed a relatively strong 9.7 per cent over the year considering interest rates remain at record lows, though the returns were not as good as either the three year period (8.1 per cent) or the five year period (11.9 per cent).

Among individual funds the top performers were: long only — Bennelong Concentrated Equities (30.7 per cent return): income-oriented — Yarra Australia Equities Pension & Charities (14 per cent); long/short — Regal Australian Long Short (19 per cent); socially responsible — DNR Capital Socially Responsible (16.9 per cent).

In such a strong year even the worst performing funds made money.

The worst three worst performing funds in the major long-only sector were Russell Australian Value Premium (6.2 per cent), Janus Henderson High Conviction Australian Equity (7.8 per cent) and Lazard Australian Equity (8.7 per cent).

Mercer investment survey funds ranking