Funds gap widens as investors seize on corona plunge
Value-focused managers have struggled for several years now—a trend exacerbated by the recent sell-off.
Mentioned: AB Concentrated Australian Equities Fund (41981), Dimensional Australian Core Equity Trust (14318), Greencape High Conviction (14653), Mercer Indexed Australian Shares (15186), Tyndall Australian Share Wholesale (3987), AB Managed Volatility Equities (40678), Vanguard Australian Shares Index (4488), Yarra Investment Fund (508), Dimensional Australian Value Trust (5840)
Investors are shifting their portfolios to take advantage of the coronavirus sell-off, as the gap widens between value and growth funds.
Over the first quarter of 2020, large-cap value managers saw net outflows of $447.6 million between January and March 2020. By comparison, around $150 million flowed out of growth funds over the period.
Morningstar manager research associate director Michael Malseed says growth managers have done very well and suggests many investors have "rebalanced" their portfolios toward this category.
For this article, I used Morningstar Direct to find the estimated quarterly flows data for the first quarter 2020. The data shows the relatively poor performance of value-focused managers—those who pick stocks based primarily on low price to valuation—versus those targeting growth-oriented companies.
"Value has struggled as a style for a number of years now, so that underperformance over a sustained period of time is likely to have led to outflows and switching," says Malseed.
Some of the sectors hardest-hit by the coronavirus sell-off—energy, materials and banks—loom large in the portfolios of many value managers. This is a key reason for the category ending the quarter a couple of points below the S&P / ASX 200 benchmark.
Investor money left the value category at a higher rate in the prior two quarters, with net outflows of more than $1 million in each of the December and August 2019 quarters.
A small number of value managers grew their total fund balances during the quarter. Top among these was AB Concentrated Equities (41981), with $71.4 million of investor money flowing into the fund in the first quarter of 2020.
Next up, Lazard Select Australian Equity (43538) grew just over $68 million, followed by Dimensional Australian Core Equity Trust (14318) with $39.9 million, and Nikko AM Australian Share (3987) with $10.6 million.
Another Dimensional strategy, the Dimensional Australian Value Trust (5840), rounded out the top five with $8.8 million of investor money paid into the fund.
Growth managers pare losses
Growth-focused fund managers—those who focus less on stock price and more on expected increases in revenue—fared better than value funds during the first quarter this year. Though still showing a net outflow of investor money, the loss was a far smaller $149.3 million. This follows outflows of around $48 million and $116 million in the fourth and third quarters of 2019, respectively.
Morningstar Gold Medal-rated growth fund Greencape High Conviction (14653) received $22.7 million of new investor money during the quarter.
Another Morningstar-rated strategy, Yarra Investment Fund (508), ranked among the small number of these funds that increased their balances during the quarter.
Sell-off spurs turnaround
But overall, Australian investors pushed more money into the market at the same time as coronavirus slashed the S&P / ASX 200 by 25 per cent, the Morningstar research shows.
Across the broader group of Australian stock funds, total funds under management grew by $221 million during the first quarter 2020, according to Morningstar data.
The same group of Australian funds saw net outflows in the third and fourth quarters of 2019, as investors pulled out $942 million and $379 million. This suggests investors cashed-out in the second-half of last year to take advantage of record share price rises, and have since poured back in to seize on the historic falls caused by coronavirus.
This turnaround suggests local investors have viewed the coronavirus sell-off as a buying opportunity. As Warren Buffett might say, a large cohort of investors bought stocks when others were fearful.
Such a turnaround has even prompted ASIC to remind investors of the risks of day trading. The watchdog last week warned about the inherent risks of short-term trading, noting that even professional investors find it hard to “time” the market in a turbulent environment.
But for investors seeking more diversification and to outsource some of the risk, managed funds are a popular option.
Passive lifts blend funds
Malseed also highlights the quarterly fund flows of large-cap blend funds, which appeal to investors seeking to invest in a combination of growth and value strategies.
This category attracted more than $800 million of inflows during the first quarter of 2020, largely because of the ongoing popularity of passive strategies including exchange-traded funds and index funds.
"They've been winning money," Malseed says.
"They're benefiting from redemptions out of active value managers that have underperformed, and from growth managers that have performed well but where people are concerned about expensive valuations."
Vanguard Australian Shares Index (4488) alone attracted more than $688 million of investor money during the quarter.
The fund holds a Morningstar Bronze medal on the strength of its diversification, low turnover and attractive fee.
Other standouts here are BT Australian Shares Index (15186) and AB Managed Volatility Equities (40678). Both hold Morningstar Bronze Medals, and attracted $563 million and $137 million of investor money, respectively, during the quarter.