(pictured: Lochiel Crafter)
The need to boost investment performance in a low return and volatile market environment is fuelling interest from investors in new strategies which are reshaping traditional active equities management, according to State Street Global Advisors. And a key trend is downside protection.
Lochiel Crafter, SSGA’s Sydney-based head of Asia Pacific, says: “In this ‘lower-for-longer’ environment, we are seeing a diverse range of investors motivated to get more for their active fees and ensure they are managing downside risk while still participating in rising markets.”
SSGA’s active quantitative equities team has raised $1billion from Australian investors in the past two years in the firm’s benchmark-unaware strategies.
Crafter says: “Our strategies bring something truly different to a portfolio. We aim to provide strong total returns in a normal market environment while providing a meaningful cushion in periods of market weakness, and our track record has proven our ability to deliver on this, outpacing the market capitalisation indices and the majority of the peer group.
“Our approach is challenging traditional active investing models based largely on performance relative to benchmark indices. These traditional strategies have demonstrated mixed performance over the past decade.”
According to Morningstar data as at June 2016, fewer than half of the 333 funds in the Australian large-cap equities category outperformed the S&P/ASX 300 Index in the last year, and only 137 produced a positive result. Of the 333 managers, 193 took on more risk than the market as assessed by standard deviation, with only 40 of those managers outperforming the index. The results were little different in the Global large blend category with only 49/199 managers outperforming the index over one year. Of the 199 managers, 70 funds took on more risk than the index and 12 of those outperformed the index.
By contrast, State Street Australian Equity Fund ranked 7/333 in the large cap Australian category over the past year, 7/313 over 3 years and 3/294 over 5 years. The State Street Global Equity Fund ranked 11/199 in the world large blend category over the past year and 3/186 over 2 years versus an unhedged index. These results were achieved with less risk than the respective markets.
Crafter said changing market dynamics had highlighted a number of issues for investors including:
- The level of fees and whether they are getting value for money
- Whether active strategies are truly active or are offering exposure to factors that can be easily exploited through inexpensive and efficient means such as smart beta strategies
- Whether their portfolios can stem market withdrawals, especially for liability aware investors.
Downside protection is provided in various ways, the coumpound effects of which are “quite powerful”, Crafter says. They include:
- Remove benchmark-relative constraints when building the portfolio – benchmark weights are not relevant
- Target companies with the highest expected return, maintaining the breadth of the investment universe by forming a view on all stocks within it and favouring those with high quality characteristics, sustainable cash flow, dividends, improving earnings outlook that are reasonably priced
- Be explicit in managing total portfolio risk achieved by estimating the volatility and co-movement of all stocks in the investable universe.
Olivia Engel, SSGA’s head of active quantitative equity Asia Pacific said: “Growing inflows to the SSGA benchmark unaware State Street Australian Equity Fund and State Street Global Equity Fund demonstrate that investors are becoming more discerning and need to see genuine active management rather than a net result which looks like the benchmark index.
“We have chosen to align our objectives to that of our investors, and that has proven to offer something unique and positive among the traditional peer set.
“We are active in seeking return and equally active in managing the associated risks. Our expectations for future investing conditions are no different to the past seven years given macro conditions are driving market outcomes. We are in a good position to navigate this environment.”