A third of Aus Equities don’t make the cut

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van Eyk has awarded five funds its top AA rating in its Australian Equities Review 2013 after one third of funds failed to clear the first hurdle.

The assessment of long-only Australian equities funds considered a total of 69 strategies. Five funds were invited to take part in the review but declined (some of these received a poor rating last year) while 19 funds were screened from the review because van Eyk considered them not sufficiently competitive.

The transparent disclosure of sample comparison should help financial planners and other research users in judging how selective the ratings process was and therefore the quality of those findings.

van Eyk chief executive Mark Thomas said he was pleased to see this issue highlighted in the recent report on “gatekeepers” in the financial system by the Federal Parliamentary Joint Committee on Corporations and Financial Services.

“It’s important that planners can see the outcome for all the funds that were considered in a review” he said. “This also helps discourage ‘ratings shopping’ by fund managers.”

In addition to the five AA ratings, the review awarded 19 A ratings, 18 BB ratings and three B ratings. Ratings of BB and above are considered by van Eyk to be investment grade.

van Eyk head of Manager Research Matthew Olsen said the key negatives for managers culled in the initial screening process were insufficient levels of active risk in the portfolio, insufficient manager skill and an investment process that was not significantly different from the majority.

“A lack of active risk means managers are much less likely to generate meaningful excess return for investors,” Olsen said. “These factors also featured in the reasons for downgrading a number of funds this year.”

A range of investment styles was represented among the recommended managers, with growth, neutral, value and one quantitative manager in the group. Fund details from this review are available to paid subscribers to van Eyk’s research.

van Eyk currently has a “medium” risk rating on the Australian equities asset class.

In van Eyk’s view, the Australian share market has normalised since the GFC but further risks loom on the horizon. In particular, there are risks around the potential for a further slowdown in Chinese economic growth, the weak Australian manufacturing sector and the fact that local banks are trading at a valuation premium compared to their global peers. Good risk control and risk awareness by managers continue to be highly regarded in this asset class.

Lead analyst on the review, Varun Venkatraman, said that over the next two to three years, returns in Australian equities may be lower than long run averages. “While our long term strategic asset allocation recommends 28% of a balanced portfolio be allocated to this asset class we are currently recommending a lower tactical exposure,” Venkatraman said.