Actively managed funds are facing stiff competition from passive exchange-traded funds (ETFs), with the latter consistently outperforming the former. But that doesn’t mean that actively managed funds can’t outperform. So, what sets apart the funds that do generate returns consistently above the market?
Fund managers and their critics consistently measure performance against benchmark indices, but getting overly caught up in performance relative to an index might be what holds many fundies back from achieving consistent outperformance.
Australian Ethical and Cyan Investment Management are two small-cap fund managers that consistently outperform the index.
Australian Ethical’s emerging companies fund has averaged a return of 19.5%pa since inception compared with the S&P/ASX Small Ordinaries Industrials index’s 10.9%, while Cyan’s C3G fund has returned 15.4%pa since inception compared with the Small Industrials’ 9.6% over the same period.
But in terms of how they invest, the index means very little. “We completely benchmark unaware,” says David Macri, Australian Ethical’s chief investment officer. “And that’s genuine. Because of our ethical guidelines, we have to be different to the market.”
Instead, Australian Ethical focuses on stock picking, not trying to replicate an index. “We think these companies have a competitive advantage – they’re undervalued, so we’ll hold a position.”
Graeme Carson, a director, and portfolio manager at Cyan, has much the same mantra. “We don’t benchmark against an index because that’s not how we think. We’re bottom-up – we want to find businesses that are growing or about to reach an inflection point to clear growth.”
Up close and personal
Investing in companies at the smaller end of the capitalization spectrum poses a range of opportunities and challenges.
Carson takes a more holistic approach to pick companies, based on a broader understanding of the business model and the people who execute it. “You need to meet the business, meet the management, have a holistic view of the numbers now and find out what they can look like if all the other pieces of the puzzle fall into place,” he says.
After that, Cyan looks at the financials, in particular: the return on investment capital.
This means dividend-paying companies are out of the question. “People want to chase yields because they think yields are good, but we don’t think they are,” says Carson. “Yield means that the profits are getting paid out rather than reinvested back into the company to grow it.”
It comes back to getting to know the business and the management to then be comfortable that they are going to reinvest the capital in a prudent way. “If they do that, the valuation is going to grow much more than a company paying out dividends.”
Continue reading your story on the app
Continue reading your story in the magazine
The Reserve Bank lifts interest rates earlier than expected
Property has boomed, thanks to cheap money, but rising inflation in the US means that may change sooner rather than later
Take the bite out of vet bills
Buying cover for your furry friend can cut the cost of pet care and avoid heartache
Staying aware of hidden threats
Spread the love
For a nation hooked on real estate, investment trusts provide valuable diversification and liquidity
Retail's rollercoaster ride
As lockdowns change the way we shop, some surprising winners are emerging from the battle for the consumer dollar
It's a big stretch to get on the housing ladder
Many young adults are living at home for longer or getting parental help so they can buy their first home
7 Steps To Building A $100k Income
The commercial sector is seen as too intimidating by many investors, but you can start a portoflio with $100,000 in cash savings
Prepare For A Green Future
It’s not just the big polluters that will have to change their ways. The carbon-conscious movement is catching up with investors too
9 Tips For Buying And Selling Property
1.The Buyers Agent 2.The Budget 3.Lenders Mortgage Insurance 4.Recurring Payments 5.Joint Ownership 6.Valuations 7.Bridging Loans 8.The Real Estate Agent 9.Auctions
Key roles in the money game
Within a relationship, we tend to slip into doing tasks that may not match our skills
The Flight of the Omnipresent Red Phin
Dr. Karen Gedney
MARIA OKORN tells the story of a medical doctor who found her calling behind bars.
Defensive line fulfills high expectations
It was the tip of the spear followed by the old guard. Washington’s defensive line lived up to expectations in its opener against Philadelphia. After the team allowed a quick 17 points, it shut down the Eagles the rest of the game while creating two interceptions for eventual touchdowns in the 27-17 victory.
SEPTEMBER 7,2019 5:48 P.M PRINEVILLE, OREGON
Going back to the S.S. era, and Clark Gable's XK120 Roadster with a removable hardtop
Rising From Disaster - Sand Springs BMX
Sand Springs, Oklahoma.
96 Minutes with … Carson Daly
The unlikely late-night host’s survival guide.
Carson blasts BBC for axing Barker from Question Of Sport
FORMER A Question Of Sport team captain Willie Carson has hit out at the BBC’s decision to axe Sue Barker – and said the host’s replacement should not automatically be from an ethnic minority background.
Maynor De Leon might not look like an athlete, but he trains like one. Having dropped a colossal 120kg – and with many more to go – That Big Guy’s very public transformation has been as much a fight for survival as a personal challenge. This is how he’s hitting back against all odds. Be inspired.
Werewolf: The Apocalypse – Earthblood
Bark at the moon in this monster RPG adaptation