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SQM Research Newsletter and Ratings Update - May 2021

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Alpha Update – It’s Still Here!

by Rob da Silva, Head of Research

We take a look at Australian Equity Managers (Large-Cap and Small-Cap) and see what value-add they’ve achieved over the 12 months to April 2021. Since the bottom in COVID-affected markets occurred in late March, this covers a period of sharp re-bound and very strong returns from “beta”.
 
The analysis covers a total of 241 products (across both categories) encompassing over $92 billion of Funds Under Management (FUM). The information is derived from SQM’s Funds Explorer Tool which in turn is powered by Morningstar data.
Large-Cap
Style
Alpha – in a Healthy State
 
Markets have had tremendous tailwinds over the last twelve months coming from two main (but not exclusive) sources:
  1. Unprecedented and extreme monetary and fiscal stimulus across the globe almost without exception. There is almost nothing central banks and governments won’t do to avoid the black hole of ongoing recession and to ensure ongoing economic recovery.
  1. Growing confidence as vaccination programs run across the globe (albeit at varying paces) and select economies start to open up.
The environment has given risk-assets a turbo charge and has been fertile ground for active managers to generate alpha as the following statistics show.
 
The tables and charts below show that around 68% of funds have outperformed their benchmarks  over the 12 months to April 2021.

The funds have been compared, where possible, to their own stated performance benchmarks.
The majority use either the ASX200 or the ASX300 Accumulation Indexes.
Performance of AEQ Large Cap Managers Cohort over 12 months to April 2021
Note that the average size of the out performance was 40% larger than the average size of the under performance. This is positive asymmetry.
The chart below manager skill (for this cohort) looks more like a normal distribution. Many more managers have outperformed than suggested by popular headlines such as “95% of managers underperform”.
The table below shows that Growth out-performed Value and style-neutral (i.e. blend) tended to come out in between. Growth (and momentum) have dominated for years now but 2021 so far has seen that trend shift in favour of Value. It remains to be seen how long that lasts.
Small-Cap
Style
Alpha – in Rude Health
 
Alpha in the Small-Cap sector has been rampant – widespread and strong!
 
The tables and charts below show that around 74% of funds have outperformed their benchmarks  over the 12 months to April 2021.
The funds have been compared, where possible, to their own stated performance benchmarks.
The vast majority use the S&P/ASX Small Ordinaries TR Accumulation Index.
Performance of AEQ Small Cap Managers Cohort over 12 months to April 2021
Note that the average size of the outperformance was a HUGE 300% of the average size of the underperformance. This is massive positive asymmetry.
The chart below shows manager skill (for this cohort) is skewed way to the right of a normal distribution. Almost 75% of managers have outperformed, many of them by a large margin.
In an interesting twist, the table below shows that Growth under-performed Value AND style-neutral (i.e. blend), which is an unusual result.
SQM Research - Top 5 Rated Funds Ranked by 1 Year Total Return
April-21
SQM Research - Top 50 ETFs Ranked by 1 Year Total Return
April-21
SQM Research - Market Benchmarks
April-21
SQM Research - Discontinued or Not Renewed
April-21
SQM Research - Recently Published Reports
April-21
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For further information:
Rob da Silva - Head of Research, SQM Research
Tel: (02) 9220 4606
Email: rob@sqmresearch.com.au

Louis Christopher - Managing Director, SQM Research
Tel: (02) 9220 4666
Email: louis@sqmresearch.com.au

Matt Hattersley - Head of Dealer Group Subscriptions, SQM Research
Tel: (02) 9220 4602
Email: matthew@sqmresearch.com.au

Peter Evans - Account Manager, SQM Research
Tel: (02) 9220 4667
Email: peter@sqmresearch.com.au
 
About SQM Research
SQM Research is an investment research house that specialises in providing fund ratings, fund research, investment and property data to financial institutions professionals and investors.
For more information please visit www.sqmresearch.com.au
 
Research Methodology
Please see below for descriptions of each star rating, whose purpose is to act as a guide for dealer group research teams and investment committee:
4.5 stars and above - Outstanding. Highly suitable for inclusion on APLs.
4.25 stars - Superior. Suitable for inclusion on most APLs.
4 stars - Superior. Suitable for inclusion on most APLs.
3.75 stars - Favourable. Consider for APL inclusion.
3.5 stars - Acceptable. Consider for APL inclusion.
3.25 stars - Caution required. Not suitable for APLs.
3 stars - Strong caution required. Not suitable for APLs.
Below 3 stars – Avoid or redeem. Not suitable for APLs.
Hold - Rating is suspended until SQM Research receives further information.
Withdrawn - Rating no longer applies.

* The definitions above are not all-encompassing. Not all individual items mentioned will necessarily be relevant to the rated Fund. Users should read the current a comprehensive assessment.
Disclaimer
The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure sta licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment.
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