After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
While known for being the flagbearer for financial product providers, the Financial Services Council is now making serious inroads into the financial advice sector.
Market neutral strategies come to the fore amid volatility
Absolute return or ‘market neutral’ equity strategies as they are widely known, may well be one of the most difficult approaches to understand for many advisers, but also to manage successfully over the long-term for portfolio managers. The basic concept is simple, to deliver an equity allocation whilst ‘eliminating equity market exposure’.
That is, groups like Sage Capital, which are part of the Channel Capital stable, seek to build portfolios that are not influenced by the day-to-day movement and vagaries of something like the S&P/ASX200. Obviously, there is incredible value for advised portfolios in a strategy that offers similar upside to sharemarket returns, but with significantly lower volatility.
The difficulty in the sector is highlighted by the dispersion of returns in the Australian market, particularly during the latest bout of volatility in which these strategies would typically be expected to outperform.
Sage Capital has consistently been among the leaders, through their use of the ‘Sage Group’s investment approach that separates the market into sub-sectors to identify risk exposures. The group was able to deliver positive returns in April, and over the last three months, whilst also more than doubling the S&P/ASX200 over the last 12 months.
According to management, the result has been driven by managing both Sage Group allocations, but also through individual stock selection. For instance, concerns about many technology companies being ‘priced to perfection’ meant the group held short positions in both Block (ASX:SQ2) and Aristocrat Leisure (ASX:ALL) in April, which paid off as earnings momentum began to fade. This trend is expected to continue as interest rates move higher throughout 2022.
In their latest update, Portfolio Manager Sean Fenton highlights his key concern that wage growth may see inflation persist at higher levels, meaning the ability of central banks to manufacture a ‘soft landing looks sim’ with prospects of a recession increasing.
On a company specific level, this combined with labour market tightness and rapidly increasing costs ‘remain a challenge for many companies’ with management preferring those with positive earnings exposure to higher rates, reasonably defensive earnings and strong pricing power. Examples in this group included QBE Insurance (ASX:QBE) and Pendal (ASX:PDL) both of which had a strong month in April.
Looking at the Sage Groups, growth carries the largest underweight on valuation concerns, with stock specific shorts driving this alongside a limited number of long positions. Defensives, REITS and yield plays are the largest overweightings, with resources having been a short-term detractor but longer-term opportunity. Both Lynas and South32 were sold off on concerns about the Chinese economic slowdown, whilst the fund was dragged by a short position in Worley Parsons which outperformed on continued strength in the oil price.
In an environment where outperforming the index is likely to become easier, due to it’s concentration, delivering a positive return may well be the challenge. Finding unique ways to generate alpha remains and protect from systematic macro risks is key, delivered through a focus on company earnings and sector exposures.
