Are there still benefits from active management in tough market?

Oksana Patron

19 July 2023

Although Aussie shares market leadership narrowed, close to Global Financial Crisis (GFC) levels, the analysis from Zenith Investment Partners suggested that there were still benefits from active management.

Zenith’s research found that Australian equities, as represented by the S&P/ASX 300 Accumulation Index, managed to generate positive returns over the past 12 months to the end of May, but at the same time 55% of constituents dropped in value, making the market leadership, which is defined by the percentage of constituents outperforming the index, narrow significantly.

Further to that, it meant that the market’s performance was driven during this time period only by a small group of stocks with strong performance, which subsequently led investors to question the benefits of active management at time of tough market conditions.

“With a limited number of stocks outperforming during periods of narrow market leadership, investors can be forgiven for questioning the benefit of active management in such times,” Zenith said in its analysis.

“Consistent with expectations, excess returns diminished as market leadership became narrower and vice versa. However, Zenith highlights that our rated funds were able to outperform the benchmark under all market regimes, even under the narrowest of conditions.

“Our analysis suggests there is a strong benefit from active management, even in tough market conditions.”

According to the analysis and its data, over the last 10 financial years, Zenith-rated equity income funds had an average income return ranging between 4.7% p.a. and 9.4% p.a., on a net return basis. Over the same period, the S&P/ASX 300 Index had an average net dividend yield of 4.3% p.a., comparably lower than all of Zenith’s rated managers.

Through the $10,000 analysis Zenith compared the income and capital growth returns of the average Zenith-rated equity income fund with the benchmark and the analysis found that over the ten-year period ending 30 June 2022, investors in the average active equity income fund received total income of $8,605 whilst growing capital by $1,824.

In comparison, an investment in the S&P/ASX 300 Index would have generated income of $6,004 and capital growth of $6,109.

But, the lower capital growth can be explained by two key factors: a higher income that is not reinvested reduces the ability for capital to compound and the lower market sensitivity of equity income funds, which are focused on maintaining a stable capital base, underperform the benchmark in rising markets.

In Zenith’s opinion, actively managed equity income products provide investors with a tailored investment solution, the analysis concluded.