A good year for active fund managers

A good year for active fund managers

Some interesting results from the latest Mercer data on Australian fund manager performance: in the year to May, the average Australian share fund manager managed to beat the S&P/ASX300 Accumulation index by 2.6%. While it is common for the best performing managers to beat the index by large margins, it’s less common for the average fund manager to beat the index by this much. In the 3 years prior, for example, the average fund manager beat the index by a much smaller 0.6%.

Active equity investing tends to be something of a zero sum game – for every active investor who beats the average, there needs to be someone on the other side, doing worse than average. If the industry as a whole manages to beat the index, then who was on the other side of the ledger? It seems as though international and retail investors must have had a bad year for this to happen.

We’re going to go out on a bit of a limb and speculate that international funds managers approach the market in a similar way to domestic funds mangers, and that retail investors bore a lot of the pain this year. Furthermore, we’re going to suggest that the thing that caused them that pain was resources companies.

We say this because resources companies have been a stand-out disappointment in the last 12 months. The chart below tells the story. It plots the ASX300 index against the ASX300 Materials index. Given that materials make up a large slice of the ASX300 index, a divergence like this has the power to significantly affect the results for the year.

So we come to a conclusion that professional fund managers as a group don’t like to invest in resources. At least, not to the extent that retail investors do. This gels with our own thinking, which is that we only want to invest when we see quality companies at a discount to intrinsic value. In the case of resources companies, a lack of pricing power makes it hard to meet the quality test, and commodity price uncertainty makes it hard to be sufficiently confident about intrinsic value.

Both The Montgomery Fund and The Montgomery [Private] Fund have dramatically outperformed their benchmarks since inception. We should acknowledge, however, that recent performance would have been less dramatic if we had maintained a “market” exposure to resources.

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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.