Summary: Australian fund managers looking to our biggest companies have been dragged down by the performance of the banks and energy stocks in 2015. The best performing Australian fund managers avoided the big names and instead focused on companies able to generate growth regardless of broader macroeconomic conditions, as well as those ready to exploit technology in sectors undergoing change. International funds performed well when they took a high-conviction approach and focused on fewer quality stocks.
Key take out: When considering fund managers, look for philosophies that focus on fewer stocks and make decisions independently of the underlying benchmark – these were the major factors in funds that outperform.
Key beneficiaries: General investors. Category: Shares.
Active fund managers who hunted beyond the ASX Top 20 over the last year were the winners in a challenging 12 months, with many of our larger stocks doing poorly. The big four banks (ANZ, CBA, NAB and Westpac), Woolworths, Wesfarmers, BHP Billiton and Rio Tinto dragged down the performance of many portfolios.
So, who were the winners?
We have cut down the amount of time you needed to spend researching the thousands of managers in the market place and have shortlisted the best performing Australian managers who invest across the 300 largest companies, as well as international share fund managers with broad mandates. The listing is based on the funds available on brightday's investing platform. The performance data in this feature is for one year, after fees.
Each fund has two defining factors that have helped it outperform respective benchmarks:
1. A high-conviction approach is pursued by holding 15 to 40 companies in the portfolio, forcing managers to back their investment decisions.
2. Investment decisions are made independent of a company or sector’s contribution to the underlying benchmark, affording managers the luxury of favouring particular sectors or avoiding them all together.
These two points are the polar opposite of managers who aim to track the index and in turn often never achieve any meaningful outperformance (if at all).
The best performing Australian shares fund managers over five years have avoided investor favourites and instead opted for companies with stronger competitive advantages and growth potential.
The common thread for each manager is their ability to identify companies that are capable of growing their earnings year in, year out. It comes down to analysing the economic environment and finding companies that have a product or service that is valuable to both businesses and consumers regardless of the strength of the domestic and global economy.
OC Dynamic Equity
Smallco Investment Fund
Hyperion Small Companies Fund
1. OC Dynamic Equity Fund
A return of 24.9 per cent in the year ending November is impressive and puts the OC Dynamic Equity Fund at the top of the list of best performing local fund managers over this time.
Contributing to the ongoing success of the fund is management’s ability to identify sectors ripe for structural change. For example, the fund has made investments in outdoor media companies - APN Outdoor Group, QMS Media Limited and Ooh!Media Limited, to exploit the transition from static to digital billboards.
The fund also considers the strength of the domestic economy and avoids companies that rely on the domestic business cycle, given their limited ability to grow their earnings year on year.
2. Smallco Investment Fund
Despite having a cash balance of over 30 per cent at the end of the March quarter, the Smallco Investment fund has displayed impressive stock picking and has returned 24 per cent year in the year ending November.
Investing around a third of the fund in media, software and technology - sectors that barely rate a mention when looking at the whole share market - has paid off. Examples include iSentia Group, a media monitoring company up 74 per cent this year alone, and outdoor advertising gurus Ooh!Media, up 125 per cent.
The fund’s preference is for small cap companies capable of operating in niche sectors, with the potential to grow earnings. Some of Australia’s largest companies in traditional segments are struggling to do this in a tepid economic climate.
3. Hyperion Small Companies Fund
Being bold, Hyperion have flagged an 18 per cent annual return for the next five years, a touch above their current five year annual run rate. It’s a call going against the grain of other fund managers, which are instead lowering investor expectations of future returns.
Management’s confidence is backed by an impressive track record. Some of the companies in the existing portfolio highlight the fund’s ability to identify structural trends within industries and pick the companies best positioned to exploit changing trends, rather than sticking to traditional businesses.
Not afraid to back their favoured companies strongly, over 10 per cent of the fund is invested in REA Group (REA), which is up over 10 per cent for the year against a wider market fall of the same amount. While this return is impressive, it’s overshadowed by Domino’s Pizza – up 95 per cent for the year.
While Australian fund managers have found gold looking further than just companies with the largest market cap, two of the international managers selected have posted impressive returns by finding 'big cap' companies. Eye watering returns have been achieved by taking a high conviction approach, holding only a handful of companies compared to their respective benchmarks.
The five year returns are impressive, but it’s important to note they have been helped along by a falling Australian dollar. Some economists are tipping the local currency has further to fall, potentially boosting returns from international shares in the years ahead.
Lazard Global Small Caps
Macquarie Global Franchise Fund
Magellan Global Fund
MSCI World ex-Australia (AUD)
1. Lazard Global Small Caps Fund
As investors have bumped up their risk appetite and economic conditions have improved, small cap companies - defined by the Lazard Global Small Caps Fund as those with a market cap between $US300 million and $US5 billion - have surged ahead. Subsequently, the fund has returned 23.5 per cent in the year ending November 30.
The fund looks to hold between 60 and 90 companies, which compared to a universe of 7000, is a relatively high conviction.
Some of the companies contributing to the fund’s success in the past year include j2 Global, an internet service business including a cloud services arm and a digital media division responsible for publishing online magazines, which is up 30 per cent. Then there’s Rightmove, boasting to be the UK’s largest property portal (similar to REA Group), up over 80 per cent.
2. Macquarie Global Franchise Fund
Most fund managers are looking for companies with a competitive advantage, but the Macquarie Global Franchise Fund takes it one step further by seeking intangible assets in the form of goodwill or patents in order to maintain pricing power and stable revenues.
The return of the fund - clocking 24 per cent for the year to November 2015 - proves it works.
Not surprisingly, the fund is tilted to consumer staples - a sector where brand names have loyalty and predictable earnings. While the fund holds a raft of well known names, including Johnson & Johnson, beverages company Kirin Holdings, Apple and eBay, performance this year has also come from major tobacco companies.
With exposure to some of the largest tobacco companies, it isn’t a fund that will meet everyone’s ethical considerations.
3. Magellan Global Fund
The investment thesis of the Magellan Global Fund is to buy businesses with the ability to earn a return greater than their cost of capital, operating in a sector with favourable economic conditions. The fund owns names you know, like Microsoft and Visa, which have both returned over 20 per cent in 2015. These returns are improved further by a weakening local currency over the same time.
In the past year, the fund has posted a return of 22 per cent, which is 5 per cent more than its underlying benchmark.
Running a 15 per cent cash balance at the end of November, the fund has the ability to deploy capital if volatility picks up early in 2016. This would allow them to buy companies at a discount to their valuation as global share markets adjust to the rising interest rates in the US.