These one-year performance figures are meaningful because it is at this time, after the widespread sell-downs marking the beginning of a bear market, that value managers’ long-held positions have historically rewarded them. It was roughly one year on from the height of the dotcom boom that Australian value managers compensated investors for years of underperformance, generating big gains through holdings in unloved, ‘old world’ stocks, such as resources. John Kightley, managing director of Maple-Brown Abbott, says the return generated by the boutique’s Australian Equity Trust for the quarter ending in September charts a similar pattern to that following the dotcom bust. The 5.1 per cent outperformance, relative to the benchmark, is second only to that recorded in the June quarter of 2000. Most of this gain, 4.1 per cent, can be attributed to stock selection, since the trust is composed 96 per cent of equities.
The outperformance was generated by an underweight allocation to the resources sector, and an overweight to defensive stocks such as Fosters and Coca-Cola Amatil. Only 0.5 per cent of the quarterly gain can be attributed to cash holdings, which account for 4 per cent of the trust. But Kightley is still not convinced that corporate earnings are adequately reflected in share prices. In its balanced fund, Maple-Brown Abbott has increased its allocation to equities from 32 per cent in 2007 to 37 per cent, but is still underweight the market. Its exposure to cash stands at 13 per cent, compared to 18 per cent in 2007. “What we see as good relative to cash is not sufficient yet to make us go overweight. It might take a while for earnings to catch up,” Kightley says.
For Bob van Munster, the head of equities at Tyndall Investments, the value recovery in the wake of the resources boom has not yet begun. “The macro factors are overwhelming any factor overall,” he says. “The world is long on pessimism. When risk appetites start to improve, value strategies will work.” While lower interest rates could spur institutions to redeem cash holdings in preference for higher yields from the equity market, investors are, Van Munster says, now similar to retail shoppers who like the look of plasma televisions on sale for $3,000, but remain hesitant to buy for fears the price may go to $2,000 a few months later. For Kightley, a big value recovery will not depend on confidence returning to the market, but the relative price movements of securities that are judged as capable of outperforming their peers.
