Key Points

  • We note that Australian equities value managers have delivered negative risk-adjusted returns during Covid-19 and have underperformed compared to peers.
  • Investors may allocate a high proportion of portfolios to value managers when they look to capture increased returns through mean reversion in the long run.
  • Value active managers have managed COVID 19 period with more downside protection and a greater upmarket capture.

    Australian Equities Value Managers – Have Delivered Negative 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 and allows one to better understand the context for short-term under and over performance. That being said, in the short term, value has underperformed compared to its peers mainly because of the low interest rate environment that supports growth investing.

    Performance Behavior and Role in Client Portfolios

    Generally, value managers specialize on picking out companies that are undervalued by the market by using qualified judgements. They help investors recognize the intrinsic value of an asset and the benefit of buying these assets when their price is significantly less than its true value. Our analysis shows that the risk adjusted returns made by the value managers was less than that made by the growth managers during COVID 19 crisis. For this reason, many patient investors who believe in mean reversion and values moving up with fundamentals over time will allocate a part of their portfolio to value managers on a long-term basis.

    Australian Value Equity managers have underperformed in Covid-19 Period based on Risk-adjusted Returns

    How did Australian Value managers perform during stressed periods? To answer these questions, we review the Risk-adjusted returns of 60 value 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 Value Australian Equity Managers

  • Analyst-Insight-Australian-Equities-Value-Managers-2 Analyst Insight- Australian Equities Value Managers deliver negative risk adjusted returns but higher downside protection during the COVID crisis.

    Exhibit 1 shows that the performance of median value managers was -0.11 during COVID-19 crisis which reflects value’s underperformance. During the Eurozone Crisis and the GFC the median information ratio was 0.21 and -0.06 respectively.


    Australian Value Equity managers have Managed Covid-19 Period with more 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 value manager have delivered 97.68% of the down market move during the Covid-19 crisis period. The downside protection statistic is more than what it was during the Eurozone Crisis and GFC.

    The upmarket capture is also higher during Covid 19 period than what it was during the Eurozone crisis and the GFC. However, it is lower than the upmarket capture of the market.

    When the skewness (distribution) of downside and upside capture is considered, Australian value managers have performed well and have delivered better upside and downside pay-offs from their bets.


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

    Analyst-Insight-Australian-Equities-Value-Managers-3 Analyst Insight- Australian Equities Value Managers deliver negative risk adjusted returns but higher downside protection during the COVID crisis.

    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.

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