Copy
SQM Research Ratings Newsletter - View this email in your browser

 

 

 
SQM Research Ratings Update
January 2021
Our Ratings & Fund Data Service covers Sector Reviews, Fund research & Quantitative analysis for about 9000 funds. For more information contact us today! Get the right information & insightful advice first from SQM Research.  To subscribe to our Ratings and Funds Data Service, click HERE.
 

2020 Scorecard : Who Won?
by Rob da Silva, Head of Research

Millions of words have already been written about the effects of COVID-19 on every aspect of life: health, social, political, economic, financial. This note does not explore these areas which have been so comprehensively discussed by so many, with more no doubt to come. This month we are keeping it simple and presenting a snapshot of the performance of managed funds across the key sectors and asset classes.
 
To do this we looked at 15-20 of the largest products in each sector and aggregated the returns for calendar year 2020. The results are in the table below and speak for themselves:

 
Category Sector 2020 Return
AEQ Growth Equity Australia Large Growth 13.65%
AEQ Value Equity Australia Large Value -3.65%
IEQ Large Cap Equity World Large Blend 3.25%
IEQ Small Cap Equity World Mid/Small 6.76%
AEQ Large Cap Equity Australia Large Blend 3.19%
AEQ Small Cap Equity Australia Mid/Small Blend 15.48%
AEQ Micro Cap Equity Australia Micro 22.74%
AFI - Duration Bonds - Australia 5.17%
High Yield Credit High Yield Credit 4.04%
Managed Futures Alternative Strategies - Managed Futures 1.66%
Infra Equity Global Infrastructure - Currency Hedged -5.77%
A-REITs Equity Australia Real Estate -5.40%
G-REITs Equity Global Real Estate -10.09%
Equity Derivative Income Equity Australia Derivative Income -1.65%
Emergina Markets Equity Emerging Markets 4.94%
IEQ Growth Equity World Large Growth 17.28%
IEQ Value Equity World Large Value -2.29%
Multisector Aggressive Multisector Aggressive 3.62%
Multisector Balanced Multisector Balanced 5.93%
Multisector Moderate Multisector Moderate 3.69%

Nevertheless, we will do a little speaking of our own. Many people prefer to absorb information via pictures and diagrams rather than tables and numbers – so here is the story of 2020:
 

(Note: all the charts that follow are total return growth of $100 from end Dec-2019 to end Dec-2020)
 

Stocks
 
Australia vs The World – Lets Call it a Tie
 
The comparison in the chart below is of style-neutral funds, so theoretically not impacted by the growth vs value tussle – we’ll get to that later.
 
Australian and International equities essentially finished the year line-ball which may be counter intuitive to all the headlines you’ve been reading. The media stories about foreign markets (particularly the US) “beating” Australia is really a story of growth thrashing value, and the lack of growth stock representation in Australia.
 
It is notable that while the end-point was very similar, the journey was not. Australia had a much deeper drawdown (down 27%) than the world (down 13%). So to catch up by the end of the year, Australia posted a much bigger rally - 41.4% vs 18.9%.




Growth vs Value – Not Even Close!!
 

How long has there been bemoaning about value persistently underperforming growth? How long has there been the thought ‘this can’t keep going on – a resurgence in value must be due soon’? Well – it didn’t happen in 2020, In fact it got worse, much worse. COVID-19 actually turbo-charged many of the ‘techy’ growth stocks that were already on a tear prior to its arrival. Forget concerts and theatre, in home entertainment was the order of the day (Netflix, anything streaming, anything gaming). Work from home – tech hardware and software for the home office (Microsoft, Apple etc.). Don’t meet people, stream people (Zoom, Microsoft Teams, Google Meet). Help sick and vulnerable people - find a test, find a treatment, find a vaccine (health sector, biotech, pharmaceuticals). Massive government stimulus that supported all these things. Interest rates that don’t know the meaning of the word “floor”. Old-fashioned smoke-stack sectors didn’t stand a chance! It’s a global phenomenon, with the US leading and Australia along for the ride.
 
  Drawdown Recovery Total
AEQ Growth -29.8% 61.8% 13.6%
AEQ Value -35.7% 49.7% -3.7%
 
17% difference for the year! Negative vs Very Positive
 
  Drawdown Recovery Total
IEQ Growth -12.7% 34.3% 17.3%
IEQ Value -20.7% 23.3% -2.3%
 
Almost 20% difference for the year! Negative vs Very Positive. One year! Same Asset class!
 
Here’s an interesting fact, unlike all the other sectors looked at so far, growth had both a smaller drawdown and a stronger recovery. Undoubtedly a darling of the markets.






Size – Big is Not Beautiful
 
The smaller the better – Micro Cap beat Small Cap and Small Cap beat Large Cap. The “conventional” risk-return playbook went through its paces. “Riskier” markets (i.e. small) had the worst drawdowns and better recoveries. MicroCap was up a whopping 98% from the bottom!
 
  Drawdown Recovery
AEQ Large Cap -27.0% 41.4%
AEQ Small Cap -35.5% 79.0%
AEQ Micro Cap -38.1% 98.3%



The same pattern held for International markets:
 
  Drawdown Recovery
IEQ Large Cap -13.1% 18.9%
IEQ Small Cap -24.1% 40.7%



DM vs EM – Did you think EM would win?
 
Well it did! Not by a lot – 4,9% return for EM vs 3.2% for DM… and EM had a worse drawdown with a better recovery.
 
  Drawdown Recovery
IEQ Large Cap -13.1% 18.9%
Emergina Markets -18.0% 28.0%

Early on in 2020 the view on EM was relatively poor, in no small measure due to an expectation that lack of health infrastructure and resources would see COVID having a greater impact. Subsequently, it appears the reverse has been the case. Developed economies, led by the US, in aggregate appear to have had markedly poorer outcomes in terms of cases and deaths – both in absolute terms and on a per capita basis. (There is a country specific breakdown at the end of this note).
 
Location EM DM EM as % of DM
popData2018 4,286,963,286 862,016,088 497.3%
Cases 26,142,092 37,998,849 68.8%
Cases / 100k 932.2 3,481.5 26.8%
Deaths 612,112 758,908 80.7%
Deaths / 100k 28.0 78.0 35.9%
 Source: Our World in Data website and SQM calculations
 



Property- the Losers of 2020
 
Infrastructure, A-REITs, G-REITs - these three property categories were the worst performers of the sectors assessed.
 
The best of a bad bunch was Infrastructure which, while it slightly underperformed A-REITs (-5,8% vs -5,4%) had a much smaller drawdown (-29.1% vs -43.1%). While G-REITs drawdown was in the middle of the pack at -32,8%, its total return was almost twice as bad at -10.1% - the only sector to be down by double digits for 2020.
 
Simply put – property in all its forms is a massively costly asset that requires high occupancy and utilisation rates to make money. COVID-19 laid waste to those usage rates. Hopefully successful and widespread vaccination will see those rates recover.
 
  Drawdown Recovery Total
Infra -29.1% 33.0% -5.8%
A-REITs -43.1% 66.3% -5.4%
G-REITs -32.8% 33.8% -10.1%



Fixed Income – Duration Beat Credit by a Nose
 
Of course interest rates fell! Central banks haven’t met a bond that didn’t like or want to buy. Controlling the level of cash rates used to be their job. Now it’s the level of cash rates, the level of the entire yield curve, the shape of the yield curve, and even the level of credit spreads!
 
Duration based products did very well to post an average 5.2% return for the year, given the low yields they were starting with. They also did what they are supposed to do in times of crisis – be defensive! A drawdown of a mere 1% versus over 13% for high yield credit. A powerful reminder of the difference between interest rate duration and credit duration.
 
  Drawdown Recovery Total
AFI - Duration -1.0% 6.2% 5.2%
High Yield Credit -13.4% 20.2% 4.0%



Managed Futures – Started Strong, Ended Weak
 
Managed futures picked up and ran with the trend well in the early stages of the pandemic. But it has been pretty much all downhill since then. A modest recovery in the last part of 2020 saw this sector post a meagre 1.7% return along with quite a wild ride.
 
  Drawdown Recovery Total
Managed Futures -3.9% 5.8% 1.7%
CPI + 2.0% -0.6% 2.8% 2.2%



Multi Sector – Consistent with Risk Profiles
 
The main Multi Sector categories behaved mostly in line with what you would expect from their relative risk. The riskier the category, the higher the drawdown, higher the recovery, and higher the return.
 
The only exception was Multi Sector Aggressive, which had higher drawdown and higher recovery but DID NOT post a higher return (the other two sectors did better). That’s what risk is – high risk means sometimes you get lousy outcomes.
 
  Drawdown Recovery Total
Multisector Aggressive -26.2% 40.4% 3.6%
Multisector Balanced -13.5% 22.4% 5.9%
Multisector Moderate -10.3% 15.6% 3.7%





Appendix – COVID Statistics for 10 EM and 10 DM Countries
 
EM   14-Jan-21 14-Jan-21 14-Jan-21 14-Jan-21
Location popData2018 Cases Cases / 100k Deaths Deaths / 100k
China 1,439,323,774 97,448 6.8 4,796 0.3
India 1,380,004,385 10,527,683 762.9 151,918 11.0
Indonesia 273,523,621 869,600 317.9 25,246 9.2
Pakistan 220,892,331 514,338 232.8 10,863 4.9
Brazil 212,559,409 8,324,294 3,916.2 207,095 97.4
Nigeria 206,139,587 105,478 51.2 1,405 0.7
Bangladesh 164,689,383 525,723 319.2 7,849 4.8
Russia 145,934,460 3,459,237 2,370.4 63,016 43.2
Mexico 128,932,753 1,588,369 1,231.9 137,916 107.0
Ethiopia 114,963,583 129,922 113.0 2,008 1.7
Total 4,286,963,286 26,142,092 932.2 612,112 28.0
  
DM   14-Jan-21 14-Jan-21 14-Jan-21 14-Jan-21
Location popData2018 Cases Cases / 100k Deaths Deaths / 100k
United States 331,002,647 23,314,521 7,043.6 388,697 117.4
Japan 126,476,458 310,734 245.7 4,119 3.3
Germany 83,783,945 2,015,235 2,405.3 45,207 54.0
UK 67,886,004 3,269,757 4,816.5 86,163 126.9
France 65,273,512 2,909,723 4,457.7 69,452 106.4
Italy 60,461,828 2,336,279 3,864.1 80,848 133.7
Spain 46,754,783 2,211,967 4,731.0 53,079 113.5
Canada 37,742,157 693,658 1,837.9 17,559 46.5
Australia 25,499,881 28,669 112.4 909 3.6
Netherlands 17,134,873 908,306 5,300.9 12,875 75.1
Total 862,016,088 37,998,849 3,481.5 758,908 78.0
Source: Our World in Data website and SQM calculations
 

Recently Published Reports


Discontinued or Not Renewed

 
SQM Research's Top 5 SQM Rated Funds* - 31 December 2020

Click here to enlarge
* Any Funds in this table that have international investments will have different hedging patterns, from hedged to unhedged or variable hedging. This may have an impact on fund returns. Please refer to the Fund's product disclosure statement for details.

SQM Research's Top 50 ETFs - 31 December 2020
Click here to enlarge

SQM Research's Market Benchmarks - 31 December 2020

Click here to enlarge

Ratings Table
(Please note: In order to view individual ratings reports you must be subscribed to SQM Research Ratings research. To subscribe, click HERE)

For further information: 
Rob da Silva - Head of Research, SQM Research - Tel: (02) 9220 4606   Email: rob@sqmresearch.com.au
Louis Christopher - Managing Director, SQM Research - Tel: (02) 9220 4666  Email: louis@sqmresearch.com.au

 
About SQM Research 
SQM Research is an independent property advisory, ratings and forecasting research 
house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors. For more information please visit www.sqmresearch.com.au

 
Research Methodology
In general, the assessment approach adopted by SQM Research incorporates a combination of qualitative and quantitative research techniques to assess property investment products. Information generated is passed through the SQM Research assessment model at the completion of the assessment process. The assessment model generates a product score, which correlates to a specific star rating (out of a maximum of five stars). Each star rating covers a scoring range, allowing products to be ranked within quarter star increments.
 Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:
4.5 stars and above - Outstanding. Highly suitable for inclusion on APLs.
4.25 stars - Superior. Suitable for inclusion on most APLs.
4 stars - Superior. Suitable for inclusion on most APLs.
3.75 stars - Favourable. Consider for APL inclusion.
3.5 stars - Acceptable. Consider for APL inclusion.
3.25 stars - Caution required. Not suitable for APLs.
3 stars - Strong caution required. Not suitable for APLs.
Below 3 stars – Avoid or redeem. Not suitable for APLs.
Hold - Rating is suspended until SQM Research receives further information. A rating is typically put on hold for a period of two days to four weeks.
Withdrawn - Rating no longer applies. Significant issues have arisen since the last report date. Investors should consider avoiding or redeeming units in the fund..
 * The definitions above are not all encompassing and not all individual items mentioned will necessarily be relevant to the rated Fund. Users should read the current rating report for a comprehensive assessment.


DISCLAIMER
The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.
        .
Facebook
Twitter
LinkedIn
Website
Copyright © 2020 SQM Research, All rights reserved.
Our mailing address is: Level 16, 275 Alfred Street, North Sydney, NSW 2060, Australia

unsubscribe from this list