Mercer tables: ECP, QVG, Smallco on top as growth funds power ahead

Mercer’s coveted survey of investment performance shows growth funds powered up over the past year, with the best delivering returns in excess of 30 per cent.

Growth funds took out the top 10 spots over the year, but a value fund placed first in the latest quarter.

Mercer’s coveted survey of investment performance shows growth funds powered ahead over the past year, with the best delivering returns in excess of 30 per cent.

As the market shifted to put fundamentals ahead of broader macroeconomic concerns, growth funds pushed past their value-focused peers, taking out all of the top 10 spots for the 12 months through to March.

Manny Pohl’s ECP Asset Management’s All Cap fund was the top performer, delivering a striking 32 per cent annual return, before fees. This was more than double the 14.4 per cent return from the S&P/ASX 200 index.

QVG’s Long Short fund came in at a close second place for the year, returning 31.8 per cent, while Smallco’s Broadcap took out the third spot with a 30.3 per cent ­return.

Rounding out the top five were Selector High Conviction Equity fund, which returned 27.3 per cent, and the Glenmore Australian Equities fund, with a 26.7 per cent return.

The rest of the top 10 – Hyperion Australian Growth, First Sentier Concentrated Australian Equities, First Sentier Large Cap Australian Equities, Regal Australian Long Short Equity Fund and Platypus Australian Equities – all returned between 22 and 24.5 per cent over the year.

It was a big shift from a year ago, when the best-performing strategy just scraped a double-digit return. ECP’s relative performance is even better, with the All Cap fund well down the rankings a year ago.

After a tough year in 2022, when interest rates and inflation were pushing higher, 2023 was a return to a more favourable environment for growth managers, ECP executive director and portfolio manager Jared Pohl said. This trend continued in the first quarter, with the fund again one of the top performers between January and the end of March.

“As expectations on the outlook normalised and earnings came through, there’s been a bit of a benefit from people focusing on operating fundamentals as opposed to just the macro,” Mr Pohl told The Australian. The biggest contributors to the outperformance over the past year included GQG, Megaport and Lovisa, each of which had short-term blips that the market perceived as bigger issues, he said.

“GQG was just a pure mispricing by the market … it’s still cheap now because it’s had significant earnings growth over the period but it was really cheap before,” Mr Pohl said.

“Megaport performed well as the new CEO Michael (Reid)’s come in. There were a few technical things around port consolidation that the market needed to work through but, again, these weren’t fundamental issues in the business.

“And then Lovisa, what drove it’s underperformance a year ago was contagion from other retailers.”

Over the year, GQG gained 70 per cent, Megaport 260 per cent and Lovisa 82 per cent.

“These were reasonably contrarian bets and us being overweight relative to the market drove the outperformance. The market’s come back to these (companies) now,” Mr Pohl added. IDP Education was one of the biggest detractors over the past 12 months but the fund is still topping up its position, confident that the long-term structural outlook for the sector is improving.

Lovisa was also a standout in QVG’s Long Short fund over the year, according to portfolio manager Josh Clark.

James Hardie was QVG’s top performer, while other contributors to the strong returns included MMA Offshore, Altium and EML

“It was a perfect environment where the market rewarded the way we were positioned … (in companies) with quality business model and long runways for cash flow growth,” Mr Clark said. The fund’s shorts also added to the outperformance, with top contributors on the short side including pre-production extractive resources hopefuls, with a skew towards battery materials and lithium stocks.

After years of macro factors such as Covid, inflation and interest rates driving share price performance, fundamentals are once again shining through across the market, according to Mercer Asia-Pacific portfolio manager Shannon ­Reilly.

“We’ve seen an improvement in terms of the breadth of managers outperforming the index more recently,” Mr Reilly said. “I think that’s because we’re starting to get back to the point where fundamentals matter more and are influencing share price perfor­mance more than what we’ve seen in recent years.”

The February reporting season helped bring the focus back to company performance and pricing power, he added.

While the top performing funds had a very strong year, just under half of the investment managers in the Mercer universe underperformed the index over the 12 months through to March.

But the industry fared better in the latest quarter, with most active managers – 69 per cent – beating the index. The top long-only performers were well into double digits over the three months through to March, with Merlon Concentrated Value Strategy, ECP Asset Management All Cap Fund and QVG Long Short Fund all returning 13 per cent between January and the end of March.

The median manager, in comparison, delivered gross returns of 6 per cent versus the ASX 300’s 5.4 per cent.

Merlon principal Neil Margolis said his concentrated value strategy had historically performed well during the February and August reporting seasons.

“This is when markets are most informed as to the facts, and we invest in undervalued companies where we think market participants have become too pessimistic,” Mr Margolis said.

Companies that contributed to his strategy’s outperformance included A2 Milk, AMP and insurers QBE and IAG, which he said reported better results on the back of higher premiums and investment yields.

“The strategy also benefited from corporate activity, with Saint-Gobain bidding for CSR and Alcoa announcing the acquisition of the 40 per cent of Alumina it didn’t already own,” Mr Margolis said.

With inflation coming down more slowly than expected, he sees further potential for outperformance.

“Macro-wise, the (March) quarter saw inflation concerns begin to remerge, and higher interest rates favour Merlon’s focus on free cash flow,” Mr Margolis said.

While ECP and Merlon were the best performers over the year and quarter, boutique Glenmore Australian Equities Fund took the top spot over three years, returning 22.4 per cent per year. Over five years, Collins St Value Fund beat out the rest with a 19.5 per cent annual return.