Absolute returns not relative returns

Published at Oct 22, 2015, in Features

A portfolio full of large caps and ‘benchmark huggers’ risks destroying investor capital when markets go south says Rhett Kessler, senior fund manager for Pengana Australian Equities Fund.

Speaking at a recent advisor roadshow, Kessler said that Australian investors can survive local equities market turmoil – such as that experienced in August and September – if they focus more on strategies that can deliver absolute returns not just returns relative to an index.

Damian Crowley, Pengana’s Director of Distribution, introduced the roadshow by highlighting that 90% of the risk in traditional portfolios came from equities. He said the majority of directly held stocks are in the top 20 largest stocks listed on the ASX. For managed funds, most people’s money is invested in mainstream “benchmark aware” strategies – heavily weighted to the ASX top 20 or top 50 largest stocks.

Concentration of any one thing can be dangerous, effectively what the Pengana crew is saying is ‘don’t put your nest eggs all in one basket’.

The result of too much concentration in one thing is that when markets take a dive, portfolios inevitably head into negative territory.

Bye bye nest egg

The gist of Kessler’s message was that investors must preserve capital in volatile times and try and minimise the impact of equity market falls, whilst maintaining returns.

“Part of doing this means when markets get crazy and expensive, and people are getting greedy, you stay focused on your investment goals and don’t simply run with the herd,” Kessler said.

During the aforementioned equity volatility in August and September, Pengana was able to take advantage of big falls in the share prices of great companies (as greed turned to fear) to convert cash into investments aimed at preserving capital and generating solid returns.

“Many investors berate their managers for holding cash, saying it’s easy to sit on the sidelines and not what they’re paying management fees for. However when markets dive and everyone is heading for the exits, we are able to reach for our wallets and buy things at great prices,” Mr Kessler said.

“We gorged on cheap stocks in August and September... It’s when there’s the proverbial blood in the streets that you want to be able to buy.”

During August and September the ASX All Ords returned -7.3% and -2.5% respectively.

Kessler said Australian investors were getting wiser about how to manage inevitable volatility, if only to help them sleep at night.

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