Key Points

  • We note that Australian equities growth managers have delivered better risk-adjusted returns during Covid-19 and performed better compared to peers.
  • Investors may allocate a high proportion of portfolios to growth managers as they look to capture the increased profitability potential in the future.
  • Growth active managers need to improve their upside and downside payoffs from their bets.
     

    Australian Equities Growth Managers – Have Delivered better Risk-adjusted Returns during Covid-19

    Many investors and asset allocators break their equity managers across various style such as Growth, Value and Core. While Value managers generally have portfolio companies that exhibit cheapness (lower PE, lower book to price than the market), Growth managers often focus on the earnings, cashflows and asset growth and their portfolios have companies that generally exhibit higher growth than the index. Core managers on the other hand look to capture the best of both worlds by picking both Value and Growth companies or those that appear well balanced on growth and cheapness. The style classification is useful to investor as it provides a simple framework for checking diversification in a multi-manager portfolio. It allows one to better understand the context for short-term under and over performance.
     

    Performance Behavior and Role in Client Portfolios

    Generally, growth managers provide insights by blending data of the future profitability along with a deep understanding of the investors risk tolerance, needs and perception. They help the investors recognize the growth potential of stocks as well as resisting the temptation of holding on to a stock if the competitive advantage of the company is disappearing. Our analysis shows that the risk adjusted returns made by the growth managers was greater than that made by the core and value managers during COVID 19 crisis. For this reason, many risk tolerant investors that are looking for high returns allocate a substantial part of their portfolio to growth managers.

     

    Australian Growth Equity managers have Managed Covid-19 Period better based on Risk-adjusted Returns

    How did Australian Growth managers perform during stressed periods? To answer these questions, we review the Risk-adjusted returns of 60 growth managers. We use a commonly referred measure called information ratio. Information ratio measures the unit of active returns (excess return relative to the benchmark) to the unit of active risk (tracking error).
     

    EXHIBIT 1: Risk adjusted performance of Growth Australian Equity Managers

  • Exhibit 1 shows that the performance of median growth managers was 0.85 during COVID-19 crisis which is a healthy result as investors have been rewarded for the active risk taken. During the Eurozone Crisis and the GFC the median information ratio was -0.23 and 0.16 respectively.

     

    Australian Growth Equity managers have Managed Covid-19 Period with less downside protection to previous crisis

    How have these managers performed from an up-side, downside perspective? Upside capture ratio is a measure that indicates the percentage of market returns captured by a manager during an up-market move. The downside capture ratio is a measure that indicates the percentage of returns captured by a manager during a down-market move.

    Daily returns data analysis shows that the median Australian equities growth manager have delivered 96.17% of the down market move during the Covid-19 crisis period. The downside protection statistic is less than what it was during the Eurozone Crisis and GFC.

    The upmarket capture is also less during Covid 19 period than what it was during the Eurozone crisis. However, it is superior to the upmarket capture during the GFC as well as the market.
    When the skewness (distribution) of downside and upside capture is considered, Australian growth managers need to improve the upside and downside pay-offs from their bets.

     

    EXHIBIT 2: Up market and Down-market Performance of Australian Growth Equity Managers

    Amongst the distribution of 60 managers, it is important to remember that there are managers that have delivered very strong payoffs. Speak to us if you would like to explore the managers that excel on the basis of upside and downside performance perspective.
     

    About the author

    Jay Kumar is an independent analyst and founding director of Foresight. He has over 25 years of experience in investment research, analysis and management. Jay gained his investment specific experience at the Reserve Bank of Fiji, Morningstar, ING Investment Management and ANZ Wealth.
     

    Foresight Analytics – unlocking your investment advantage.

    Foresight (www.foresight-analytics.com) is a data-driven, investment research, analytics and consulting firm. Foresight is not owned by any product provider or manufacturer. The firm’s business model is purely based on fee-for-service.

    Using its innovative, evidence-based framework, Foresight provides analytical, predictive and market intelligence solutions to leading investment management companies, superannuation funds and wealth groups. Foresight’s capabilities are underpinned by leading data and technology infrastructure that blends statistical, fundamental, and behavioural insights.

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