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The Most Volatile 12 Months in the Last 10 Years - How Did Active Managers Fare?

Australian Fund Monitors

25 February 2021

The 12 months through the end of January marks one of the most volatile periods for equity markets in the last 10 years.

• In March 2020 the ASX 200 Total Return Index recorded its largest single monthly fall in 10 years falling -20.65%, while February 2020 it fell by -7.96%, the 3^rd largest fall in 10 years.
• Fortunately for investors, the last 12 months also included the 2 largest single month gains over the last 10 years with the ASX 200 Total Return Index bouncing back in April by 8.78%, and again in November by 10.21%.
• For all that volatility - or perhaps because of it - the ASX200 Total Return Index fell by -3.11% over the 12 months.

While not quite as volatile, global markets returned similar statistics.

• In 2020 AFM's Global Equity Index had 10-year record monthly loss in March of -8.07%, and -5.57% in February.
• As expected, the Global Index also bounced back in April by 4.15%, and then had the second-best month in the last 10 years in November.

The bulk of investors in Australia get exposure to these 2 markets via both passive and active fund managers. The outcome for passive equity investments is shown in the points above - in other words investors in a "passive" ETF will broadly match the index, after allowing for fees, but how did Active Managers both globally and domestically perform through this period? Looking at Long Only Managers we note the following points:

• 79 of the 97 or 81% of Australian Equity Funds beat the index through the 12 months, and all but 11 of these funds beat the index over the last 3 years, showing they have been able to sustain outperformance through the cycle.
• 23 Australian Equity funds lost more than 25% in March 2020, but 18 of these went on to record an outperformance over the index over 12 months.
• The defining statistic for those Australian Equity funds that outperformed was their "Up-Capture Ratio" which measures their cumulative performance during the market's positive months. The average Up-Capture Ratio for the top 20 performers was 193.6 (any number over 100 shows outperformance, so 193.6 means they rose at almost double the rate of the market, confirming significant value can be derived from active management.
• Global funds found the going far more difficult with 36 out of 53 funds outperforming the global market (68%). However, one third of the funds that outperformed in the last 12 months failed to beat the benchmark in the previous 3 years.
• As with Australian Equities, many Global funds - 33 in total - underperformed in March, while only 22 of these went on to outperform over the full 12 months.
• One of the key statistics for Global funds that did outperform was their Down-Capture Ratio, which measures their cumulative return when the market is falling. Unlike Australian Equity Funds, their most successful Global peers were those that gained against the market during the negative months. The average Down Capture Ratio for the 15 best performing funds was just 43.4 showing that these funds on average only fell less than half as much as the index when markets were negative.

The data shows that volatility can be a friend for Australian Equity funds, although that volatility may test the mettle of many investors. For Global fund investors it may be useful to note the quote from Warren Buffett - "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1".

Of course, we all know that's easier said than done. However, one way to reduce volatility, or avoid large losses, is to ensure diversification across markets, strategies and asset classes, and ensuring that the correlation of those diversified funds is as low as possible.

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Australian Fund Monitors' CEO, Chris Gosselin, speaks with Robert Swift from Delft Partners about the Delft Global High Conviction Strategy. Since inception in August 2011, the Strategy has risen +14.93% p.a. with an annualised volatility of 11.78%. Over that period, the Strategy has achieved Sharpe and Sortino ratios of 1.08 and 1.97 respectively, highlighting its capacity to achieve good risk-adjusted returns while avoiding the market's downside volatility.

Longlead was founded in 2014 and is a specialist long/short equity manager with a core focus on Asia & Australia. The team at Longlead have recently released and Australian Domiciled Wholesale Unit Trust based on their existing Longlead Absolute Return Fund.

The Longlead Absolute Return Fund was started in July 2017 and has returned 29.24% per annum since inception. For most investors the proof of an absolute return manager is in their performance during down markets, and Longlead have provided investors with a positive return 64% of the time when Asian Pacific markets are negative, generating significant outperformance.