In a research report of 51 international equities managers available on the major Australian retail platforms, van Eyk Research has found that only one was worthy of its highest rating and just 14 others recommended.
Chris Bigg, senior investment analyst, said at the launch of the report last week that the majority of strategies fell short of the mark, which was to consistently outperform the benchmark by a reasonable margin in the long term.
“Managers need to have an intelligent and well-resourced investment team, a sound investment process and a competitive edge in stock selection to consistently outperform,” he said. The only one to get the ‘AA’ van Eyk rating was a boutique firm, IFP, through its IFP Global Franchise Fund. Two other small funds, run by Australian-based boutique Magellan Financial Group, were considered at the top of the ‘recommended’ list.
Bigg said that it was no surprise that boutiques rated well relative to the international universe, as represented on platforms in Australia.
IFP (Independent Franchise Partners) was formed last year by a group of former Morgan Stanley Investment Management staff who had run a similar concentrated fund at their old firm. The strategy seeks ‘quality’ stocks with strong brands or franchises and therefore good pricing power.
But the van Eyk research underscores how poorly the Australian retail investor is served in accessing the best available international funds.
Brigg said that global equities managers were increasingly focusing on quality companies, with greater emphasis placed on sound balance sheets and strong cashflow generation. The problem with this is that those stocks are less often mispriced or misunderstood, which therefore limits the alpha potential of the managers.
“Flexible investment processes that rotate their concentration in both quality and low quality stocks based on current valuations and top-down considerations may be better placed to deliver greater alpha over time,” he said.
Another consideration for the Australian retail, or institutional, investor is that the dividend yield from international remains much lower than Aussie equities despite trading on a higher free cashflow yield.
“US companies in particular remain reluctant to pay out a substantial proportion of their free cashflow in dividends,” Bigg said. “In our opinion, generous options packages provide a major disincentive for management to pay large dividends and US companies could pay a much higher yield if management teams were incentivised to do so.”
About 70 per cent of managers in the review group were underweight North America, with an average underweight exposure of 7 per cent.