The best and worst Aussie equity funds of 2019
We sort the wheat from the chaff in a year marked by record low rates, weak growth and trade tensions.
Mentioned: Coles Group Ltd (COL), Tribeca Alpha Plus Class A (15451), Hyperion Australian Growth Companies (3344), DNR Capital Aus Eq High Conviction R (40948), Lazard Select Australian Equity I Cl (9323), AMP Ltd (AMP), Alumina Ltd (AWC), Cochlear Ltd (COH), CSL Ltd (CSL), James Hardie Industries PLC (JHX), Lendlease Group (LLC), QBE Insurance Group Ltd (QBE), REA Group Ltd (REA), Whitehaven Coal Ltd (WHC), Woodside Energy Group Ltd (WDS)
In a year when record low interest rates took centre stage, a growing army of investors begun moving along the risk curve in search of returns. And those who chose the best performing Aussie large-cap actively managed equity funds were richly rewarded, with returns of up to 33 per cent, Morningstar data shows.
At the end of 2018, the ASX 200 slipped 2.84 per cent after a dismal fourth quarter. No doubt, investors were expecting an average year ahead.
But the market quickly recovered its losses, reaching an all-time high in July and November. And while ongoing geopolitical tensions rattled markets, it's been a healthy year in the equity market.
2019 has been a strong year for three key reasons, says Morningstar senior analyst, manager research Ross MacMillan:
- Investors’ relentless hunt for yield in the low rate environment and the RBA's possible pursuit of quantitative easing
- Investors seeking stocks that can outperform in a low growth, low inflation market
- The continued growth of passive funds that indiscriminately buy stocks in the underlying indices
According to Morningstar Direct data, the strongest funds under Morningstar coverage with investments in large Australian companies have delivered returns of up to 33 per cent year to the end of November. Even the worst performing funds are in positive territory, with the weakest performing returning 15.5 per cent.
However, MacMillan says it's been another difficult year for value managers, who seek out for long established, quality companies, with low price-to-earnings ratio. Only one large-cap Aussie equity value fund under Morningstar's coverage delivered above-index returns.
"It's just not what's been chased by markets now. The market is chasing yield and growth, so very few value managers outperformed in 2019," he says.
Growth and blend managers have broadly performed well against the index. Only two growth funds under coverage failed to beat the S&P/ASX200 benchmark return of 26.13 per cent.
Of the more than 60 large-cap Aussie equity funds in the blend, growth and value categories (active, unlisted) under Morningstar coverage, 22 beat the S&P/ASX 200 benchmark return of 26.13 per cent after fees, or just over 30 per cent.
We have looked at the performance of Aussie large-cap actively managed (unlisted) equity funds Morningstar under coverage so far in 2019.
Best performing large-cap Aussie equity funds
At the top of the pile, the silver-rated Hyperion Australian Growth Companies fund delivered another year of strong returns to investors, returning 33.66 per cent year to date. Hyperion benefited this year from holdings in investment bank and financial services firm Macquarie Group and global cloud-based accounting software platform Xero.
"Good businesses with structural growth tend to do really well in a low-growth or subdued environment," fund managers Mark Arnold (managing director and chief investment officer) and Jason Orthman (deputy chief investment officer) says.
"Broader growth is hard to find, and the consumer is pretty fatigued - that's why we're seeing interest rates declining. In a pretty subdued economic backdrop, when you've got these quality, structural growth companies, they tend to outperform."
"REA Group is a business we've held for over 15 years and has been the No 1 contributor of rolling 12 months and over 5 years," they said. "It's an elite business with structural business with structural growth which can deliver over long periods of time."
Morningstar senior analyst Matthew Wilkinson says Hyperion's goal is to "find stocks that can deliver sustainable superior earnings growth".
"Financial and industry analysis is amongst the most thorough we’ve seen," he says.
"The resulting portfolio holds no more than 30 names and is highly concentrated with every holding having a compelling reason to be included. Technology, healthcare, and financial services dominate the portfolio."
Hyperion Asset Management chief investment officer Mark Arnold, named Australian Fund Manager of the Year by Morningstar in 2016.
Hyperion has an exceptional track record since its 1994 inception. It has far outpaced the S&P/ASX 200 Index benchmark and average rival during the trailing five-, 10-, and 15-year periods to September-end 2019.
Wilkinson says sizable positions in such high-conviction portfolios can be costly for investors if anticipated growth doesn’t transpire. For example, strategy fell 38.92 per cent in 2008 - worse than the market. "Hyperion’s punchy approach delivers periods of feast and famine," he says.
Arnold and Orthman say the Aussie market has benefited from decline in interest rates – which have driven down discount rates and increased PE ratios for stocks. However, they point to underlying EPS growth, which has been low across the market in 2019. Ahead, they expect low EPS growth to continue into 2020.
"The world is going to remain low growth for a long period of time in terms of GDP growth, and therefore interest rates will remain relatively low," they say.
"In this environment, we really think investors need to be in quality, structural growth businesses that can actually take market share or have pricing power than can actually deliver their own internet growth."
Coming in at No 2, DNR Capital Australian Equities High Conviction fund delivered a stellar 30.85 per cent to investors, year to date, after suffering below-benchmark returns in 2018. DNR benefited from the spectacular turnarounds in building products maker James Hardie and multinational construction, property and infrastructure company Lendlease.
Source: Morningstar Direct, 1 Jan 2019 to 30 Nov 2019
2019 has been a strong year for concentrated Aussie equity large-cap funds. Half of all funds that beat the benchmark reported fewer than 40 holdings (long) in the portfolio.
But MacMillan warns that those investing in these strategies will need to take a longer-term approach, with returns likely to be volatile from one year to the next.
"If managers do make one mistake, make a big bet on one stock that underperforms, they can have a year where they return below the index," he says.
The Tribeca Alpha Plus fund defied analysts' expectations, delivering a fifth-place return of 30.04 per cent for the year. Morningstar analysts placed the fund on negative in April after portfolio manager Sean Fenton unexpectedly resigned, leaving Jun Bei Liu as the sole portfolio manager. The situation intensified later that month when quantitative analyst Peter Moore also resigned.
"Our Negative view doesn't rest on Liu, but on the risk the situation could become disorderly," former Morningstar analyst Alexander Prineas wrote at the time.
Of the funds that outperformed the benchmark in 2019, nine also outperformed and over the trailing five- and 10-year periods.
Source: Morningstar Direct, YTD (1 Jan 2019 to 30 Nov 2019), 5 Yr (1 Dec 2014 to 30 Nov 2019), 10 Yr (1 Dec 2009 to 30 Nov 2019)
Worst performing Aussie equity large-cap funds
The poorest performing Aussie equity fund was the Bronze-rated Lazard Select Australian Equity fund, which delivered 15.50 year to date. The fund's portfolio is highly concentrated, with just 27 companies. Among its top holdings are mining company Alumina Ltd, and petroleum exploration and production company Woodside Petroleum, both of which underperformed the market.
Detractors from the portfolio this year were financial services company AMP Limited, whose stock dropped from $2.44 to $1.96 over the year, and Whitehaven Coal. Conversely, investments in Coles and QBE paid off.
MacMillan says the fund has solid foundations, including a highly experienced senior investment team that diligently applies a sound research process. However, he says high-conviction concentrated strategies can be volatile at times and this fund’s disappointing short-term return profile supports this view.
"This style and value ranking process, in a concentrated strategy, has resulted, on a trailing returns basis, in significant outperformance against the equity Australia large-value Morningstar Category index and most peers over the trailing 10 years to 30 Sept 2019," he says.
"Unfortunately, the approach has also resulted in Lazard on occasions being susceptible to poorer quality stocks and value traps, negatively affecting annual returns.
"Ultimately, we believe the long-term record makes up for the short-term downside, so long as investors are prepared to be patient.”
Source: Morningstar Direct, 1 Jan 2019 to 30 Nov 2019