NZ active managers are poised to regain their outperformance mojo, according to a new AMP Capital paper, pending a “sentiment reversal”.
The just-released study argues that the fundamental factors underpinning NZ domestic share managers’ historical benchmark-beating record remain in place despite the more recent period of sub-par performance.
Since June 2017, the median active NZ equities manager has underperformed the S&P/NZX 50 index, the AMP report shows, breaking a long-running trend.
But the paper, authored by AMP Capital NZ investment research manager Daniel Mead, says the local share market continues to exhibit both the strong price dispersion and stock volatility that should support active management strategies.
NZ share managers, though, have been stymied by the flood of yield-seeking money – local and global – pouring into the NZX large cap, high dividend stocks over the last couple of years, spurred on by gutter-level interest rates.
“These market phenomena has seen the domestic equity market pushed to record highs, causing domestic fund managers to shy away from the recent outperforming stocks that are trading on high P/E multiples,” the AMP Capital analysis says.
“… While it remains possible to add value above the market index in the current environment, most domestic fund managers appear to have tilted away from the recent outperforming stocks which are trading on high P/E multiples, and instead are positioning portfolios for a market downturn or a change in market leadership.”
The study shows the median NZ equities manager tends to outperform better in downturns than during up markets. Historically, almost 60 per cent of domestic share managers have beat the index in downturns compared to about a third during bull markets.
Of course, timing a market regime change is problematic. The NZ market has already seen a few false dawns recently, the report says, “usually coinciding with short-lived global events”.
Yet NZ large cap, high yield stocks have persistently bounced back to evermore stratospheric levels buoyed by inflows and a certain amount of natural resilience.
Eventually, however, the mood will sour, the report says, as valuations “become unjustifiable even in best-case earnings scenarios”.
“Given the degree of recent divergence between index performance and active managers’ returns, it is likely that when a persistent market leadership change does unfold, the index return is likely to substantially lag the active group for a period, as market-cap weighted index-tracking funds automatically unwind their larger holdings which have become unduly-influential exposures in a portfolio context,” the AMP Capital paper says.