Value investors were rewarded in 2022 as rising interest rates and inflation caused investors to flee from high growth stocks saddled with debt, in favour of high-quality businesses with strong cashflows.

Lazard Asset Management

Lazard Asset Management named Morningstar's fund manager of the year. Picture: Morningstar

It’s a strategy that has seen Lazard Asset Management take out Morningstar’s top fund managers award in 2023, after lagging their growth-focused peers in recent years.

Morningstar Australasia’s director of manager research ratings Annika Bradley says the firm is underpinned by a strong investing culture.

“Australian investors are well served by a solid line up of quality managers, but Lazard Asset Management wins our Overall Fund Manager of the Year award for a strong performance across their stable of funds and a preparedness to consistently put investors first,” Bradley says.

It follows a challenging year for investors, with traditionally defensive strategies offering little protection from the global selloff of bonds and stocks.

Vanguard Investments Australia - which took out the top award in 2022 - failed to rank as a finalist in any of the eight categories. 

As well as taking out the top award, Lazard’s gold rated Select Australian Equities fund won in the domestic large cap equities category.

Due to its strong value tilt, the portfolio is heavily skewed towards financial services, insurers, and energy - sectors that had an especially stellar year.

The fund delivered a total return of 26.6% for the 12 months to the end of December.

Lazard Select Australian Fund

Faithful investors rewarded

Yet the concentration on value has meant the fund has lagged its peers in recent years as ultra-low interest rates and the covid pandemic fuelled enthusiasm for growth stocks, technology stocks and so-called working-from-home stocks.

Weak returns from 2018 to mid-2021 dragged down solid long-term numbers relative to the benchmark.

“Despite a notably disappointing 2019 and 2020, the strategy fares better than the category benchmark over the 10-year period to 31 July 2022,” Morningstar senior analyst Chris Tate says.

“The strategy’s value skew saw it struggle in 2008-09, but had a great run from 2011 to 2014 when it outperformed index in each calendar year.”

The fund managers behind the strategy, Rob Osborn, Phillip Hofflin and Aaron Binsted, favour companies that have sustainable earnings but are underappreciated and overlooked by the market, with the belief that return on capital and valuations will revert to the mean over time.

Even though value has struggled for some time, the recent market has demonstrated investment styles can fall in and out of favour quickly.

Similarly, previous winners can go through rough patches. Hyperion Asset Management took out the title of fund manager of the year in 2021, but its small cap growth fund was down 27.9% in 2022.

Agility aids outperformance

Diversification and agility were identified as winning strategies across other categories. 

Boutique firm DNR Capital took out the small cap award for domestic equities with its silver rated Australian Emerging Companies fund. Holding 20-45 stocks, Morningstar analyst Callan Maclennan says the portfolio is well diversified across sectors.

“A defining characteristic is the team's willingness to spend time identifying quality opportunities among energy, resources, and materials stocks. Many small-cap peers simply shy away from these businesses because of the complexities in forecasting their risk and rewards,” he says.

However, the cost of 1.15% per year plus a performance fee of 20% on excess returns over the S&P/ASX Small Ordinaries Index is on the expensive side.

GQG Partners took out the global equities award for its silver rated Global Equity fund, delivering total annual returns of 0.8% in 2022 against the benchmark of -12.4%. In 2021 it returned 25.6% against the benchmark gain of 26.5%. 

Annika Bradley

Morningstar Australasia's director of manager research ratings Annika Bradley at the Morningstar Awards. Picture: Morningstar

Rajiv Jain, chief investment officer and chairman of the firm describes his approach as "quality-growth," seeking companies with a strong market position, a record of prudent capital allocation, and a history of weathering tough economic conditions.

Speaking on the sidelines of the Morningstar Awards on Thursday evening, GQG Partners Australian managing director Laird Abertheny said the fund had shifted out of technology and ramped up its energy holdings in late 2021. 

In the sustainable investing category, AXA Investment Managers took out the title for its silver rated AXA IM Sustainable Equity fund, which Morningstar ESG analyst Erica Hall says combines a systematic low-volatility, high-quality skew with a focus on reducing downside risks.

“The rally of low-quality, high-volatility stocks in late 2020 was hurtful, but AXA’s long-term approach provides a simple yet effective systematic global equities methodology with significant ESG considerations at an attractive 0.35% fee,” Hall says.

“AXA's ESG focus does actively come through in the portfolio; whole industries like tobacco or cluster-bomb manufacturers are excluded. Additionally, the portfolio has an Above Average Morningstar Sustainability Rating of 4 globes, a Morningstar Low Carbon Designation and a Morningstar ESG Commitment Level of Advanced.”

The fund delivered total returns of -8.8% in 2022 against a benchmark of -12.4%. 

While annual returns are important, one year doesn’t set up investors for long term success.

The winners were determined on a combination of qualitative research by Morningstar's manager research analysts, risk-adjusted returns over medium- to long-term periods and performance in the 2022 calendar year.

The criteria balances the performance of fund managers with consistent strong returns over the long term, not just rewarding those with the most impressive one-year return.