At a glance, Australia's homogenous 'banks-and-resources' share market does not look like the most promising alpha hunting ground. But according to some of Australia's leading boutique fund managers, appearances can be deceiving. James Fernyhough reports.
Australia's share market is probably best known for two things: it is dominated by financials and mining companies; and it pays high dividends.
Australian retail investors, meanwhile, are also known for two things: they are some of the most prolific owners of shares in the world; and they have a major home bias.
On the ASX All Ordinaries, 41.9% is taken up by the financial sector and 17.2% is materials. The third biggest sector is consumer staples, at 7.6%. Few developed economies have this sort of sector dominance.
Less than 25% of the UK's FTSE All Share index, for example, is made up of financials, while around 21% is made up of oil, gas and basic resources. In the US S&P 500, financials make up 16.5%, while in the S&P Europe 350 index, financials make up 21.9%. Canada's TSX Composite index is one of the closest to Australia's, with 34.1% financials, 25.2% energy, and 12.7% materials.
While you could argue that Australia's homogeneous, lopsided equities market is working out all right for us, it is hardly the most stimulating investment environment around. For a fund manager looking for surprising, exciting companies springing up in unexpected sectors, Australia is not the place to work. That, at least, is the received wisdom.
Then there is the investor side. While superannuation funds have started to widen their nets to include sizable allocations to global equities, mum and dad investors have retained their home bias. Self-managed superannuation fund (SMSF) investment habits are a good indication of retail investor sentiment, and the figures show a striking bias towards Australian rather than global equities. According to Rainmaker research, as of the end of June 2013, 32% of self-managed superannuation fund (SMSF) money was in direct Australian equities, while just 1% was in global equities.
The fact that retail investors like what they know is also reflected in the surprising (and well-documented) portion SMSFs allocate to cash: 30%, according to Rainmaker. This paints a quantitative picture of Aussie investors as rather a traditional lot who will stick with what they know regardless of whether or not it is good for them (according to Investment Trends, the historically low cash rate has done little to push SMSF trustees into new asset classes).
The facts, then, go some way to confirming the caricature of Australia as a land with a homogeneous share market and conservative investors. But is there any more to it than that?
The short answer is, yes. Despite the indisputable dominance of financials and resources and the quantified conservatism of investors, there is more going on in Australian equities than meets the eye. There is actually a thriving active fund management industry in Australia employing all sorts of ingenious strategies to add alpha to their portfolios.
For the full story, download the April 7 issue of the Financial Standard iPad app here.
Correction: In the print version of this story we referred to Alphinity principal as Johan Arldberg. His name should have read Johan Carlberg.
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