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Sun may soon set on passive managers: Grant Samuel

Glenn Freeman  |  24 Mar 2017Text size  Decrease  Increase  |  

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A director of Grant Samuel Funds Management has defended its underperformance during 2016, hitting out at passive managers whose bull run he says "can't go on forever".


With a 6.37 per cent rolling average return in 2016, the fund underperformed the MSCI World ex-Australia Index last year.

"The question you ask yourself given that recent history, compared to the long run, is so vastly different, is how long does [the bull run] go on," says Damien McIntyre, director and head of distribution, Grant Samuel Funds Management.

He was addressing a gathering of financial advisers in Sydney on Thursday, as part of a national roadshow taking place in Australian capital cities.

"Intuitively, it doesn't make sense to me that earnings would be a negative contributor to equity market reserves--that can't go on forever, you can't beat gravity," he says.

"At some point in time--and I'm happy to give the indexers their day in the sun now, well done! But this self-fulfilling prophecy, given the market is in love with lowering costs and buying an index, I think it's reasonable to assume that this can't go on forever."

With a Silver rating from Morningstar, the retail fund has a mix of value and growth stocks, which "frequently favours the telecommunications, utilities, and consumer stables sectors," according to Matthew Wilkinson, Morningstar manager research analyst.

He says the struggles faced by the Grant Samuel Epoch Global Equity Shareholder Yield Unhedged [16301] in 2015 were largely due to its overexposure to mining an energy companies.

"The fund has also underperformed the index in 2016, particularly in the second half, when interest rates rose sharply and the yield trade unwound," Wilkinson says.

However, Grant Samuel's McIntyre is confident the portfolio manager's persistence will pay off. Its strategy is focused on only owning companies that return 6 per cent of their market capitalisation to shareholders per year, in the form of cash dividends, share buybacks and reductions in debt.

"So, straightaway, we're very non-index like in what we set out to achieve ... we're also looking for earnings growth at a modest 3 per cent clip from every note we own," he says.

McIntyre emphasises the "important defensive role" this fund can play in retail investment portfolios--"apart from paying a premium over cash rates, it also allows capital to appreciate at a rate higher than inflation".

"Of course, when markets become uncertain, investors want certainty, and they gravitate back to dividends every time, because there is a clarity and a comfort to dividends--and when markets are rough, people just want peace and quiet," he says.

"Dividends will always be your friend when markets become uncertain and volatile."

McIntyre also drew on the well-worn hare and tortoise allegory, with index funds the former and active funds the latter.

"Dividends play an important role in your portfolio ... simply because they may be unattractive relative to benchmarks, which are at all-time highs right around the world, just remember that this is the tortoise and the hare. And as we all know; the tortoise wins the race over the long run," he says.

"Bear that in mind, and remain confident in dividends in terms of the comfort they give in the portfolio."

Morningstar's Wilkinson is also confident in the underlying resilience of the fund.

"Nevertheless, [managing director and portfolio manager] Eric Sappenfield and his team have consistently kept to their investment approach of focussing on quality and cash flow regardless of the prevailing market conditions, which should see reliable relative performance going forward," he says.

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Glenn Freeman is Morningstar's senior editor.

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