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A good year for active fund managers?


A good year for active fund managers?

The ASX has gone nowhere this year. After strong performances in 2012 and 2013, 2014 is looking decidedly lacklustre going into the home straight.

One of the features of the year to date has been the very poor showing by resources companies. The Australian equity market has a heavy weighting to resources, and when commodity prices decline, the Australian equity market can lag those of other nations. Clearly this can be a positive as well – in boom times a strong resources market will drive the ASX higher.

In the long run, however, it seems to us that the negatives outweigh the positives. In particular, the boom and bust cycle, the unpredictability of commodity prices, the vulnerability to the vagaries of supply and demand, and the wasting assets that require continual renewal make the resources sector one of our least favourite parts of the market.

We’re not alone in this. Quite a number of value investors struggle with the quality and value equation in the resources space, and are structurally underweight to mining companies. In their stead there is no shortage of index or quasi-index managers who will always have a big position in BHP simply because it is BHP.

We are certainly not suggesting that mining companies can’t be good investments. Rather, we think investors need to be compensated adequately for bearing the risks and challenges inherent in the sector, and that means a healthy margin of safety. During 2014, examples of this have been thin on the ground.

Perhaps the point of this is that in the equity market we have, with its high concentration of large banks and large miners, investing in “the index” may not make as much sense as it does elsewhere. If your local index happens to be well diversified and stocked with a wide range of world-class enterprises, then by all means invest in it. In Australia, perhaps a more thoughtful approach is warranted.


Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. I invest in the Montgomery fund expecting only modest returns owing to the philosophy. I also like to prove that through life experiences and business acumen that I am able to beat the fund which brings me joy. I would love the fund to take more risks and may be invest in the global market. The asx accounts for a mere two percent of the world market and it seems silly that we bypass all these other companies because they are not listed on the asx.

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