The NZ equity market has a unique ‘factor’ profile compared to global norms, according to new Russell Investments research, that could form the basis of a new active management benchmark.
Sydney-based Russell portfolio manager, James Harwood, told the group’s annual conference in Wellington last week that ‘momentum’ and ‘growth’ were particularly strong factors in NZ relative to the rest of the world.
However, NZ market ‘quality’ and ‘value’ factors significantly underperformed versus global metrics, Harwood said.
He said the results show NZ could be a “good market for factor investing… but it’s not clear why it behaves differently than the rest of the world.”
Sharing the podium with Harwood, Andrew Bascand, Harbour Asset Management chief, suggested four possible reasons for the NZ factor weirdness:
- a long-term “value bias” in the NZ manager and broking communities that removed any price arbitrage across value stocks;
- surprising growth in the NZ economy over the Russell sample period;
- the outsize influence of global investors targeting NZ yield stocks rather than growth; or,
- specific performance of a handful of NZ stocks over the research period that rendered the findings “idiosyncratic and not repeatable”.
Regardless of the underlying reasons, Harwood said Russell research found the optimum mix of factors over the sample period in NZ was also markedly different compared to both global and Australian results.
He said Russell back-tested a theoretical NZ optimal factor portfolio for the sample period against real active manager returns.
“[Factors] are simplified versions of what active managers do,” Harwood said. [The research] shows to what extent factors influenced returns.”
The study found the median NZ active manager outperformed the Russell ‘strategic factor benchmark’ in the early years of this century.
“But in the most recent seven-year period the median manager has not kept up with the strategic factor benchmark,” he said.
Bascand said the recent underperformance of active managers against the factor benchmark could be due to a number of stock-specific quirks – such as Xero or a2 – or an interest rate environment that favoured yield companies over the latest seven-year stretch.
“But [active managers] need to do better, we need to beat the factor portfolio,” he said. “Maybe investment consultants and fund managers should not be comparing performance against market-cap weighted benchmarks but factor benchmarks.”
Harwood said Russell could develop a factor-based overlay for the NZ market similar to an Australian product slated for launch next month.