Expect more long-short and enhanced income Oz equity funds

Friday 3rd July 2020 Penny Pryor

Zenith Investment Partners has just released its sector report for Australian Shares Large Companies. As the pandemic hit Australia in the middle of the review, half of the fund manager visits ended up being conducted via video conferencing, a development which was not entirely negative according to Jacob Smart, senior investment analyst.

“What I noticed is that because people didn’t have to travel as much, you got nearly better access to a lot of people,” he says.

“We actually probably got to meet people we wouldn’t meet every year.”

Managers were very much on the front foot and were being very proactive with client communications.

Areas for growth

For large cap Australian equities Zenith looks at an initial universe of 177 products. This year 17 of those funds were rated “Highly Recommended” (see below), 74 were rated “Recommended”, 25 were rated “Approved” and 61 were “Not Rated”.

Smart concedes that there is a rather large universe of Australian equity investment products in Australia and expects there may be some consolidation over time in the number of managers. But he also predicts there to be more innovation in products.

“If there was an area where we could see growth [in products] in the future maybe long-short,” he says.

Enhanced income funds, where income is enhanced through a focus on dividend yield of the holdings, is another area where Smart expects to see more product.

Ratings actions and capital raisings

Of the ratings actions in large caps, there were two upgrades, no downgrades and eight new funds analysed.

“With a sector like Australian equities, which is more mature, you would probably expect to see less movement,” Smart says.

Many of the large cap managers partook in the many placements that were available this year as companies sought to shore up balance sheets.

Zenith’s analysis found that the managers reviewed participated in 43 of the 57 placements during 21 February 2020 and 31 May 2020, which produced an average return of 33% to 31 May 2020.

One of the things that surprised Smart was that participation in placements was by both value and growth managers.

“We sort of put that down to the ASX changing the rules…not everyone was raising it because they were in trouble,” he says.

On April 1 2020, the ASX eased capital raising rules to allow companies to raise up to 25% of their capital on issue without shareholder approval, as opposed to the usual limit of 15%, up until 31 July 2020.

Zenith Highly Recommended funds June 2020

More about Zenith Investment Partners

Back to Insights