Hi Wendy, this was written by the Australian Equity team at Schroders run by Martin Conlon and Andrew Fleming.
Thanks Michael. For every company we value, we determine "sustainable earnings", which is an average level of profit we expect a company to make in the future; this may often be a long way from current earnings. We feel that the Australian banks will earn (approximately 25%) less in the future than they do currently, especially as credit growth slows and credit costs and other regulatory penalties rise. Having said that, the current earnings multiple attaching to the Banks is relatively low, whereas for many ASX companies, and especially growth oriented industrials, multiples are very high. Hence, even as profits fall, it need not be that the Banks are ultimately poor investments, especially from this point relative to other companies listed on the ASX. Put another way; in recent years, multiples have tended to be pro cyclical, that is, as earnings have risen, so have multiples, and vice versa. In the past year; that has started to reverse so that as an investor you may invest in a company which has earnings growing/being upgraded but still underperforms (as Wisetech Global, say, has in the past year) or alternatively a company where earnings are falling/being downgraded but where the share price has outperformed (as Chorus, say, has in the past year). Of course, for most companies, multiples tend to still follow earnings, but there are now exceptions to the rule starting to emerge when multiples get to extremes, and we would expect this to continue apace. Hope this helps. Regards Schroders Australia
Hi Tim, there will always be some active managers who underperform and some who outperform over different time periods. Interestingly if we go back a few years there were some consistent periods of outperformance by the average active manager. We would always caution any of these statistics (both the positive and negative ones) as 1) they don’t cover the full universe of funds, 2) they are not asset weighted and 3) the fees that are used are generally not the fee for investment but include a number of other fees. As noted above there is recent research that demonstrates institutional active management accounts have outperformed passive benchmarks. As the head of a passive ETF provider I'm sure you have your own views, but hopefully this is useful a contribution to the topic.
Hi Albert, The issue is that many “index” funds are not investing along broad market capitalisation weights as many of them are not broad market index funds. That is what is creating distortions.
Hi Graeme, The active vs passive debate is really the subject of many other papers....but we should be aware of the fact that anyone who is not a market cap based passive investor is by definition an active investor. This covers both professional and non-professional investors, pooled and segregated funds, retail and institutional, offshore and onshore. A recent academic paper by Gerakos, Linnainmaa and Morse covering $17 trillion of assets under management shows that institutional active management accounts have outperformed passive benchmarks.
Thanks for your question Patrick. In terms of growth we are referring to more traditional measures of “momentum growth”. We prefer to focus on measures of Value and Quality. Quality investing aims to offer investors a more stable form of growth investing and a far more consistent return profile than traditional growth managers. We focus on identifying companies that are profitable, offer stable growth and are financially strong while avoiding ‘glamour’ or thematic stocks which we believe carry a higher risk of disappointment. Value investing is a style of investing which focuses on companies whose shares appear under-priced; these may include shares that are trading at, for example, high dividend yields or low price-to-earning or price-to-book ratios. Our measure of Value is much more broadly based (30+ value measures) than a single measure. (I’ve included our broad definitions in the attached image on the original post.)