Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Equity funds back in vogue
Australian investors put more money into traditional equity funds in February and March than they did in the whole of 2019, prior to the impact of covid-19. A new index shows Australians also had more conviction.
According to figures from Calastone, which passes about 95 per cent of all fund flows, mostly from platforms, to fund managers, flows bounced back in February and March after a subdued January. A total of $3.0 billion in new capital was invested in the March quarter, almost half of it in March alone, taking the annual figure to $9.5 billion.
Calastone has introduced its fund flow index (FFI) to Australia, which demonstrates an analysis of the trades to show a level of conviction. This index, which was introduced to the UK last year, averaged 60.1 per cent over the past six months in Australia, which shows buying outweighed selling by 1.5 to 1.0.
The firm says that the score is “extremely high”, for instance, compared with 53 for the UK during the same period, which was considered “very positive for equity funds there”.
But the analysis shows that the buying is not indiscriminate. “Australians have especially favoured global equity funds and funds focused on Australian equities. Specialist sector funds and emerging markets have also seen good demand,” Calastone says.
“Meanwhile, investors have consistently withdrawn money from equity income funds which have been hit by the unprecedented dividend cuts of the last year in Australia, Europe and the UK, in particular.
“Sell orders for income funds have outgunned buy orders more than 2:1 since April last year. Income funds had seen outflows for nine consecutive months by the end of March. Investors have shunned European equity funds too, though these are a small category for investors here.”
The analysis shows some evidence of greater switching between funds in recent months. Turnover (applications plus redemptions) has risen and over the last six months was more than a third (35 per cent) higher on average than it was in 2019. In March, turnover reached a record $7.0 billion.
Ross Fox, head of Australia and New Zealand at Calastone, said the Government’s stimulus measures had provided unprecedented support to the economy while the Reserve Bank’s quantitative easing had suppressed interest rates to record lows.
“With authorities all round the world pursuing similar policies, the resulting stock market boom had sucked in massive amounts of new capital to equity funds,” he said.
“The preference for global and Australian equity funds reflects investor judgement that this country will join the global leaders as the pandemic comes to an end. Booming commodity prices that are especially positive for Australian share prices and the economy here are clear evidence that this judgement is already proving right.”
He said that “stirrings” in the bond markets and the long-awaited return to strong performance for value funds had prompted a significant rotation in equity markets.
“Big tech has come off the boil as its ‘jam tomorrow’ valuations get impacted by higher long-bond yields, while stocks typically considered ‘value’ like mining companies have proven more attractive again. All this is driving higher trading volumes in funds as investors switch their holdings.” The FFI is designed to show the relative enthusiasm with which investors are buying or selling assets. As an example, $1million of buying is not much if it is only the difference between $100 million of buys and $99 million of selling. That would generate a reading of 50.25 on the index. But if $1 million of net buying is the difference between $3 million and $2m of selling, you get a reading of 60, which is very positive.
