While much ado is made of the science that goes into fund manager research, real assessment puts comparable weight on the art as well according to investment leaders.
While financials and materials dominated trades leading into 2024, the popularity of other sectors like healthcare and information technology followed generational, and even demographic, lines.
Managed fund levels head back toward record highs as returns improve
Australia’s managed fund industry grew to $4.4 trillion in the December quarter of 2022, marching back to near-record levels, while investors continued diversifying their portfolios into offshore assets despite the outperformance of local shares.
Data from the Australian Bureau of Statistics showed the consolidated assets of managed fund institutions rose 2.4 per cent from the September quarter’s total of $4.3 trillion, approaching the sector’s highest-ever level of funds under management (FUM), $4.55 trillion, recorded a year earlier in December 2021.
Superannuation funds led the growth of FUM, with the value of Australia’s super pool rising 3 per cent to more than $3.4 trillion during the December quarter, while investments in retail managed funds rose by 2.3 per cent to $489 billion.
Most asset classes delivered positive returns over the December quarter on signs that inflation was cooling as central banks around the world raised interest rates. International shares returned 5.5 per cent, while Australian shares returned 9.1 per cent. Australian and global bonds returned 0.4 per cent and 0.7 per cent, respectively.
Over the year to December 31, Australian stocks outperformed dramatically. Data from GESB Superannuation shows the Australian Shares – S&P/ASX 300 Accumulation Index falling by only 1.8 per cent, while international shares, as measured by the MSCI World ex-Australia Net Total Return Index, fell 15.3 per cent (see chart).
Offshore assets hold attraction
Despite the better performance of local equities in 2022, Australian investors put $1.73 trillion with offshore fund managers in the December quarter, just short of the $1.74 trillion record notched a year earlier and up from $1.72 trillion in the September quarter.
The level of funds invested in offshore assets now accounts for 21.4 per cent of all managed fund assets in Australia, compared with 14.1 per cent 10 years ago. In contrast, the level of managed funds invested in Australian shares stood at 18.7 per cent in December 2022, down from 20 per cent in 2012.
Market observers say investors are diversifying their portfolios away from Australian shares and property into offshore assets in hopes of reaping greater returns. According to CommSec, the Australian sharemarket makes up around 2.2 per cent of the world’s total by share market capitalisation.
Steven Tang (pictured), head of consulting at Zenith Investment Partners, said while Australian equities didn’t suffer the same downturn as other equity markets in 2022, that could change in 2023, and an allocation to international shares and other assets remains important.
“Although the structure of the domestic market has proven favourable in a rising inflation and interest rate environment, and we maintain a healthy weighting to Australian equities, there is a point at which interest rates start to act as a headwind.”
Zenith’s return expectations for global equities, including small caps and emerging markets, have improved, while unhedged global equities provide diversification benefits.
“These are the asset classes or subsectors that have sold off the most over the past 12 months or so, and once the threat of higher inflation and rates and recession risk recede, upside potential will emerge,” Tang said.
Bonds, too, are expected to perform better this year and remain important to portfolios. The standard 60/40 portfolio experienced its worst year in over a century in 2022, and bonds had one of their worst years on record, but moderating inflation is expected to boost the performance on government bonds and corporate credit. And portfolio returns for a traditional 60/40 balanced portfolio now look the best they have since 2015.
“As for what that means for optimal portfolio construction going forward, the higher return expectations will lead to allocating more to bonds and higher-grade credit,” Tang said.
