Researcher Morningstar downgraded five Australian equity funds in its latest review of the sector, reflecting the increased scrutiny that active equity managers have come under in recent times.
It also found that concentrated equity funds have produced consistent outperformance.
Listed investment company Australian Foundation Investment Co was downgraded from ‘silver’ to ‘bronze’; BetaShares Australian Top 20 Equity Yield Maximiser was downgraded from ‘neutral’ to ‘negative’; CFS Future Leaders was downgraded from ‘bronze’ to ‘neutral’; Fairview Equity Partners Emerging Companies was downgraded from ‘bronze’ to ‘neutral’; and Franklin Templeton Australian Equity was downgraded from ‘silver’ to ‘bronze’.
“The buoyant growth of passive investing has resulted in greater scrutiny on active managers, particularly concentrated strategies,” Morningstar says.
It upgraded one fund. Alphinity Concentrated Australia Share was upgraded from neutral to bronze.
And it initiated coverage of six funds – Airlie Australian Share, BetaShares Australia 200 ETF, BlackRock Concentrated Industrial, Investors Mutual Concentrated Australian Share, Schroder Equity Opportunities and T Rowe Price Australian Equity.
Morningstar reviewed the performance of concentrated Australian equity portfolios, which have become increasingly popular in recent years, to see if they achieved outperformance.
It analysed the returns of all domestic equity strategies with a 10-year track record and found that concentrated equity strategies have “an excellent record of outperformance against the index over the long term.”
However, less concentrated strategies (holding up to 70 stocks) also achieved excess returns. It is only when a fund holds 100 stocks or more that returns are likely to be similar to the index or marginally worse, particularly on an after-fee basis.
“Undoubtedly, there is a link between concentration and excess returns in the Australian market, but outperformance is also possible by strategies with concentration levels higher than many investors and managers believe is optimal,” Morningstar says.