Market Update

A fund manager, also known as an investment manager, works in teams that are responsible for managing trading activities for an investment fund.   They typically pool investors’ funds to access a broader range of investment opportunities. 

Some fund managers specialise in one asset class or investment, like shares or fixed income investments, and others might invest across a range of asset classes. 

Investment teams can pool expertise or have complementing expertise as well.  So for fund managers who invest in shares, for example, they will live and breathe the stocks and companies they’re evaluating and investing in, and they have the resources to research both the companies and the market, to use this information to make profitable decisions. 

At Aware Super, my role is to select and manage the fund managers which invest in shares on our behalf. This means assessing and deciding on the quality of the fund managers we partner with, overseeing our on-going relationship with them, and deciding on how much of our portfolio we should allocate to individual fund managers.  We look for skilled, expert investment managers which have different and complementary areas of expertise, because this helps increase the diversification of our portfolio.  

No. There are literally thousands of fund managers in Australia and globally, and they’re certainly not all created equal. We focus on identifying the managers of the highest quality, those we believe will help us reach our performance goals. 

There are no guarantees of great outcomes in investing, but our experience over time has been that by targeting managers who meet our strict criteria we’ve been able to give our members the best chance of strong returns. 

Just as there are a range of different assets to invest in, it follows there are different styles, approaches and specialities with fund managers. Because we invest with a wide range of different managers, that means we also assess the allocation of funds between managers. There’s strength in diversity and a strongly diversified portfolio of managers, is most likely to deliver us the best outcomes in terms of performance.  

Broadly speaking, fund managers fall into two categories. 

1. Passive managers

Also known as index managers, they choose investments to form a portfolio that closely tracks a market benchmark (or index). They don’t actively pick stocks and usually charge lower fees because they don’t require extensive resources to select managers. 

2. Active managers

They try to outperform the index by researching companies or stocks in-depth and making a judgement about which to hold, which to sell and depending on their view, these managers can hold more or less  stock than the index. 

Some of the investment strategies that active fund managers use include:

• Small capitalisation strategy invests in smaller companies, those with a smaller market capitalization. They would not invest in companies like BHP or the four big Australian banks, for example. 
• Sector specific strategies focus on particular themes or sectors. For example, if the focus is innovation, the manager would most likely invest primarily in technology stocks, such as Microsoft. 
• High conviction strategies have portfolios made up of fewer stocks - the fund manager’s ‘high conviction’ or 20-30 best ideas.  
• Value managers seek to identify stocks they believe are trading at prices which are undervalued, in the expectation that the price will go up over time as the market recognises the true value of the stock. Examples in the last year include stocks in the energy sector and some banks. 
• Growth managers look for companies stocks which they expect will grow at an above average rate compared to the industry or market as a whole. These are often smaller, younger companies which the manager thinks are poised to expand and increase profitability in the future. An example of companies which would be considered growth are Tesla and Amazon. 
• Emerging markets funds invest in stocks in emerging market countries, like Brazil, India, Chile, Hungary, Thailand and others. 

You can see that fund managers use myriad styles with the aim of delivering returns to their investors. 

When deciding which fund manager is right for you, it’s important to think about your goals and objectives, and to look at the makeup of your investment portfolio overall and how a specific manager or strategy might complement it. 

Over the last year or so, higher inflation and interest rate have negatively impacted markets. Because markets have been concerned about the strength of economic growth, we’ve seen poor performance from Growth fund managers that focused on companies that were expected to grow at an above-average rate. These companies are typically considered ‘growth’ like Tesla and Amazon. They are considered a consumer discretionary company selling goods or services consumers see as non-essential, so less likely to buy from them when times are tough. 

Value fund managers, on the other hand, have performed much better over the past year. These managers invest in companies which have higher levels of earnings and/or dividends compared with their price in the market. 

Examples of 'value’ companies include stocks in the energy sector and some banks. 

Looking forward and taking a longer-term view of markets, I don’t expect that inflation or interest rates will dominate markets in the same way they have over the past year, even if they remain a feature in the headlines. The market has already priced these factors in, and with the RBA holding interest rates on April 4th, there is some evidence to suggest we’ve reached the peak or close to the peak of interest rates. 

This means that we expect that our fund managers’ skill, or ability to identify individual stocks which outperform the market as a whole, is what will really drive performance.

Superannuation is a long-term investment, and our strategies reflect that. Short-term market volatility is a fact of life in investing, and it’s important not to overreact and make kneejerk or radical changes when it happens.

With that said, a good fund manager will always take into account current market conditions as well as their view of future market conditions and include these views into their investment decisions.

Tyndall is one of our value-style Australian equities managers. We recently asked them for their opinion about the market now.

“With the era of free money firmly in the rear-view mirror, it’s a good time for active managers. There is real value in undertaking thorough fundamental research and objective corporate valuations to identify those rare ‘hidden gems’ investors may have by-passed during these uncertain economic and political times.

We can’t predict the economic outlook with certainty, we do know that Tyndall’s value style of identifying companies whose shares represent good value should outperform. Equally important for us is to identify those companies which have over earned due to the impact of Covid-19.

Finally, a good active manager can add value in identifying important secular trends and the companies that will benefit from those trends. Renewable energy is the future and we are just at the start of a super-cycle for future-facing transition metals – we also know that 10 years of under-investment in gas will drive a supply shortage in a commodity that is critical to the energy transition.” Tyndall Asset Management.

We take care in choosing our partner fund managers, and we work closely with them on an on-going basis, so we don’t usually have nasty surprises. We certainly expect that the fund managers we choose will outperform the broader market over the long-term, that’s why we choose them in the first place after all!

But still it’s inevitable that in certain market environments some managers will underperform. That’s another good reason why it’s important to diversify a portfolio across different styles and approaches – to minimise the risk of significant underperformance across the whole portfolio.

When assessing fund managers, it’s important to look at how they perform in different market conditions. For example, in a market where ‘cheap’ stocks are outperforming, we would expect our value managers to outperform. Underperformance can be a catalyst to review a specific manager where underperformance is not expected. Prolonged underperformance is certainly a cause for concern and review because it may indicate that the manager is not as skilled as previously thought. For example, if the investment environment is supportive of a manager’s style, but the manager has not performed in line with expectations, that would raise concern.

In that case our usual process is to start with a check for immediate red flags – is the manager following the stated investment process, investing within proper parameters, for example, or have they lost key investment managers from the team? These are all factors which can materially affect a fund manager’s ability to perform.  

It’s so important to look at each fund manager in context – are they ‘true to label’ and doing what they say they will do, sticking to their investment strategy?  And of course, for us, how do they fit into our portfolio? Are they performing the role we expect them to perform alongside the other managers we partner with. 

Given our long-term investment mindset we are conscious of the need to balance short-term opportunities and risks with our long-term goals. That said, one area of focus for us is the energy transition, which presents risks, but also opportunities. For example, we are seeing more companies with exposure to either critical inputs or technology that will be essential in a shift away from more traditional energy sources like oil and coal. We are very conscious that while this is an interesting theme, however, it’s important to critically assess and appropriately value these opportunities.