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Fund spy: banks, oil prices hammer active managers

Glenn Freeman  |  25 Mar 2020Text size  Decrease  Increase  |  
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As the global epidemic is hitting some sectors harder than others, funds with weightings to cash, consumer defensive and telecommunications are holding up better.

But the financials sector - the bulk of which comprises Commonwealth Bank of Australia (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ Bank (ASX: ANZ) - is down 30 per cent.

"Bank share prices are off the most because of their sensitivities to business lending risk, because a lot of small businesses are going to go to the wall," says Morningstar Australia manager research analyst Michael Malseed.

Further, he says the big four's interest margins have been crimped as the RBA seeks to staunch the bleeding from the coronavirus by cutting interest rates, and banks have been following suit.

"So, the next six to 12 months is less about banks' profitability and more about supporting their customer base, simply so they can survive," says Malseed.

In the energy sector, oil and gas majors Woodside (ASX: WPL) and Santos (ASX: STO) have shed 50 per cent and 61 per cent of their respective share prices.

And Australia's flagship airline Qantas (ASX: QAN) has ceded a jaw-dropping 63 per cent of its share price since mid-February. Travel and tourism companies across the board have been some of the worst affected by the coronavirus.

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For the purposes of this article, with the assistance of Malseed, I've used Morningstar Direct to find how exposed the index is to different sectors. By viewing the full list of companies in the Vanguard Australian Shares ETF (VAS) we're able to gauge the benchmark for each sector.

It should also be noted that observing performance figures over such a short timeframe - while interesting to compare how the coronavirus crisis has affected funds here and now - isn't particularly useful over the longer term.

And before I name some funds, you're reminded to rely on Morningstar analysts' Medal Rating and other long-term performance research in selecting those appropriate for your own portfolios. They take a far longer-term view than we're discussing here.

The wooden spoon

Yarra Australian Equity (4544) has been the worst performing fund since the sell-off began in mid-February. It has returned negative 39 per cent over this admittedly short time-frame.
In other words, $10,000 invested in the fund on 20 February would now be worth slightly less than $5,750.

"It's underweight consumer defensive, and looks to be overweight energy and basic materials as well," Malseed says.

Yarra's top five

fund weight 1

But in a more useful gauge of the Yarra fund's performance, it has returned 6.5 per cent and 4.3 per cent over three and five years.

Russell High Dividend Australian Shares ETF (RDV)

This yield-focused strategy ranks second in the worst-performing stakes over the recent sell period.

The Russell ETF is non-traditional in that it tracks a custom index of high dividend-paying stocks rather than an established index.

"It's not a passive ETF, but one that targets yield," Malseed says. "And to do this, it has a significant overweight to the banks, which are the biggest underperformers relative to the broader ASX 200 at the moment."

Russell's cyclical stocks

cyclicals russell


Dimensional Australian Value Trust (5840)

In third place is Dimensional Australian Value Trust, which also holds a Morningstar Bronze medal rating.

Value managers have under-performed those pursuing Quality and Defensive and this fund is a prime example. Value-targeted funds concentrate on trying to buy companies they regard as cheap, instead of targeting those with higher earnings and growth potential that are firmly in the sights of growth managers.

Those value managers who bought up cheap energy companies have been hurt most in recent weeks as the oil price has crashed. A double-whammy effect occurred as coronavirus hit demand and the largest OPEC producers Saudi Arabia and Russia refused to cut output despite plummeting oil consumption.

The Dimensional strategy is hit by a different double whammy, being overweight both energy and financial services. Some 12 per cent of its total portfolio is in energy companies as at the end of February. The index, on the other hand, holds just 3.6 per cent energy stocks.

Bank holdings have also weighed down Dimensional recently. Around 40 per cent of the shares it owns are financials, versus 28 per cent for the index.

"Those value managers that have sought value in these sectors have suffered the most," Malseed says.

"Dimensional uses a quantitative strategy, and energy stocks appear attractive to their value style, so that's why you see them favour banks too."

Among funds with the highest exposures to energy, the Morningstar Bronze Medal-rated Lazard Select Australian Equity (10702) stands out as one of the most overweight to the sector. Lazard's portfolio comprises 17 per cent energy stocks.

And the manager also follows a value strategy, another key reason for its negative 34 per cent return in the last month.

A happier story

On the other side of the ledger, consumer staples and some parts of the mining segment have held up better during the coronavirus sell-off.

Key stocks here are Woolworths (ASX: WOW) and Coles (ASX: COL). The former is down only 13 per cent for the obvious reason: its focus on selling consumer staples, including toilet paper - demand for which has soared during the coronavirus. [link to Lex's column]. Coles’ share price has actually gained 6 per cent since mid-February.

Among miners, shares in Fortescue Metals Group are only down 1.1 per cent. This is largely because iron ore shipments haven't stopped, and the Aussie dollar has dropped. Given commodities are priced in US dollars, this increases the margin earned by local miners. They've also been focused on stripping out costs and boosting efficiency in recent years - and low-debt companies are winners in the current climate.

And at infant formula company A2 Milk (ASX: A2M) "the coronavirus outbreak has not dented the company's performance in the region to date," says head of equity research for Australia and New Zealand, Adam Fleck.

In the resilient telecommunications sector, rising reliance on mobile and data services during the coronavirus epidemic has reminded consumers just how essential they are. With low debt relative to its peers, Telstra's shares are down just 17 per cent between 20 February and now.

Hyperion Australian Growth Companies (3344) holds no energy, basic materials or real estate companies, and is heavily overweight healthcare and technology companies.

"So despite having paid over the odds to buy high quality companies they've certainly held up better in this selloff, particularly in healthcare and technology," Malseed says.

And Investors Mutual Concentrated Australian Share - whose returns in the past suffered because of high cash holdings - now benefit for the same reason. "They also have very high weight in telecommunications, and a low exposure to energy. And despite being a value manager, they haven't played energy."

is senior editor for Morningstar Australia

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