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How long do Aussie funds take to recover from a crisis?

Emma Rapaport  |  14 Apr 2020Text size  Decrease  Increase  |  
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Sharp falls on global stock markets in March will have spooked many investors. Asset classes across the risk spectrum fell, including high quality bonds. Worst hit was the Australian real estate investment trusts index, down a staggering 35 per cent.

When your portfolio is falling in value, fast, it’s hard to imagine it ever bouncing back. A natural instinct is to stop the bleeding—to take decisive action instead of riding out the storm. But experts will tell you the worst thing you can do is sell, crystallising your losses.

While past performance is not indicative or a guarantee of future performance, analysis of how Australian equity funds fared after the global financial crisis of 2007/8 could provide some comfort.

Active managers can bounce back

We looked at how far Morningstar rated funds fell at the worst—and how long it took them to recover. To do this we look at a measure called “Maximum Drawdown”, which indicates the biggest trough in a fund’s performance over a period - in this case from 1 January 2001 until 29 February 2020.

The Maximum Drawdown date for the S&P/ASX All Ordinaries TR index during this time was in November 2007, by which point it had fallen a toe-curling 48.28 per cent.

Maximum drawdown for AU broad market indexes

Index returns

Period analysed: 01/01/2000 - 29/02/2020. Data at Friday 10 April 2020. Source: Morningstar Direct

According to Morningstar Direct data, 23 Morningstar rated AU equity funds had a maximum drawdown which was less than 48.28 per cent— more than half. Most of those came in the November of 2007, as the index tumbled. 

The Hyperion Australian Growth Companies fell 45.63 per cent by the time it reached its nadir, and the Pendal Australian Share 41.57 per cent. The Australian Ethical Australian Share achieved the best performance among the funds we analysed—down 28.83 per cent.

AU Equity funds that had a maximum drawdown less than the index (top 10)

Table1

Period analysed: 01/01/2000 - 29/02/2020. Data at Friday 10 April 2020. Source: Morningstar Direct

What is crucial for investors to note, however, is how long it took these funds to recover. The "Recovery Period" shows how many months it took to recoup their losses and climb from trough to peak. And while it took the S&P/ASX All Ordinaries TR 56 months to recover the losses of the financial crisis, some active fund managers were able to turn things around far more quickly.

AU equity funds that turned themselves around the fastest (top 10)

Search performed for Australian flagship equity funds, across all Australian equity categories including large, mid and small cap, and income which were incepted before 1 January 2007, under Morningstar analyst coverage. 

Hyperion Australian Growth Companies fund, mentioned above, rebounded within 47 months. The Hyperion Small Growth Companines fund had it biggest drawdown in 2000 rather than 2007.

Table2

Period analysed: 01/01/2000 - 29/02/2020. Data at Friday 10 April 2020. Source: Morningstar Direct

The Australian Ethical Australian Share fund took just 22 months to recoup its losses. Celeste Australian Small Companies fund followed closely behind at 23 months. 

Investors can also take comfort from the long-term performance these funds managed to achieve, despite such a major setback. Hyperion Small Growth Companies, for example, has delivered annualised returns of 11.9 per cent over 15 years and Australian Ethical Australian Share 7.7 per cent.

Five of the funds in the list—or half—have produced stronger returns than the index over 15 years.

From trough to peak

Many AU equity funds suffered even greater losses than the stock market during the financial crisis, which is par for the course for an actively managed fund. CFS Wholesale Geared Share fund saw the greatest maximum drawdown, falling 74.18 per cent from its peak by November 2007. 

AU equity that had a maximum drawdown greater than the index

Search performed for Australian flagship equity funds, across all Australian equity categories including large, mid and small cap, and income which were incepted before 1 January 2007, under Morningstar analyst coverage. 

Table 3

Period analysed: 01/01/2000 - 29/02/2020. Data at Friday 10 April 2020. Source: Morningstar Direct

Unsurprisingly, many these funds took longer to recover than the market too; the CFS Geared fund took 97 months to get back to its peak, for example.

But others fared much better. While the Hyperion Small Growth Companies fund fell more than the market—down 56.48 per cent at its maximum drawdown points—it took just 32 months to recoup its losses. It has also delivered annualised returns of 11.9 per cent over 15 years, outperforming the All Ords index over the period.

Perpetual Wholesale Smaller Companies also took less time to recover than the market, at 24 months, and has delivered annualised returns of 6.58 per cent over 15 years.

Despite enduring greater maximum drawdowns, almost half in this list have delivered stronger annualised returns than the index over 15 years.

Charting a correction

If we compare the S&P/ASX 200 TR AUD index maximum drawdown from 1 November 2007 to recovery on 20 September 2013, to what's happened with the same index since the end of February 2020, we can see that while the 2020 index has fallen much sharper in the first two weeks, it has not yet reached the same lows as 2008.

S&P/ASX 200 TR AUD | Market crash to recovery Nov 07 – Sept 13 vs Feb 20 - Today

correction

Source: Morningstar Direct


- with Holly Black, senior editor, Morningstar.co.uk. An analysis of UK Equity Funds can be found here

is an editor for Morningstar.com.au

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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