Invest
The 6 unique Australian market affects that all active managers can exploit
Invest
The 6 unique Australian market affects that all active managers can exploit
The uniqueness of the Australian equities market is providing fund managers with an opportunity to essentially beat the market, new research has revealed.
The 6 unique Australian market affects that all active managers can exploit
The uniqueness of the Australian equities market is providing fund managers with an opportunity to essentially beat the market, new research has revealed.
A study released by UBS has revealed the uniqueness of the Australian market compared with the world, which opens plentiful opportunities for investors to exploit it.
According to UBS, the Australian market is highly concentrated, with large financials and resources companies making up almost half of the large cap index. And while these companies are large today, over the last 20 years, equity funds have outperformed their benchmark.
Comparing this to the Small Ordinaries index, the make-up of the index is fairly similar, admittedly with less sector concentration.
However, in the small part of the market, consumer discretionary plays a larger role as does the IT sector.
Despite at times being a contentious issue, Australia’s unique market make-up, its market oligopoly premiums and generous dividend systems, and its bias around December are creating unique opportunities for managers to get ahead.
In fact, UBS’s research showed that whether or not they are taking advantage of the market, active fund managers in Australia have a proven track record over the last two decades.
“Over the past 20 years, equity funds have outperformed their benchmark, with large cap managers on average outperforming their benchmark by 1.5 per cent before fees, while small cap managers have outperformed by 6.5 per cent before fees on average,” UBS analyst James Cameron said.
And while inventors do not necessarily need to exploit these market anomalies, UBS noted understanding the market can be an advantage.
“These effects are persistent, so they can be exploited systematically. However, at the very least, investors should be aware of them, as there is no point trying to swim against the current,” Mr Cameron said.
The Australian market provides active managers with opportunities to beat the market, but what are these opportunities?
Franking: Franking is a system of dividend imputation which eliminates double taxation of dividends. The net effect is that companies that pay out franked dividends outperform the market.
Dividend run-up: As income and “franking” are such important parts of the Australian market, there is a preference to invest in companies that pay out profits to shareholders. This can cause companies that pay dividends to outperform into the ex-date by around 1.3 per cent. This can be meaningfully higher in sectors with high levels of franking.
Dividend drop-off: Following a dividend payment, share prices can drop off by less than their dividend amount on the ex-date. However, there are some interesting implications for franked dividend-paying stocks when including the following trading day into the analysis.
Seasonality: There are a number of seasonal effects within the Australian market including the tax year-end effect, the reporting season premium and the Santa Claus rally.
Oligopoly premium: UBS has found evidence that suggests industry groups that aren’t oligopolies tend to outperform. The oligopoly effect explains that in sectors dominated by oligopolies, large companies outperform small companies, and that in sectors not dominated by oligopolies, there is a small cap premium.
Index effects: There are significant inclusion/deletion effects in the Australian market, which UBS suggests is a function of the ownership structure of the Australian market. These effects are fairly persistent and, as a consequence, investors in the Australian market should be aware of their existence and the impact they might have on their portfolios.
Conclusion
“Australian active managers have performed well over the past 20 years. When we decompose returns, we typically think about returns being driven by beta, macro factors, sectors, styles (or quant factors) and idiosyncratic risk,” Mr Cameron said.
As a final note, he added that it’s “critical for active managers to be aware of these structural and behavioural effects, as investing against them can be like swimming against the current”.
About the author
About the author
Stock market
Markets succumb to jitters as US CPI maintains strength
Following a slight drop of 0.2 per cent in the United States inflation rate, the latest US April consumer price index (CPI) data indicating higher than expected figures has triggered a fall in the US ...Read more
Stock market
Qantas forecasts return to profitability, announces ultra-long flights
Qantas expects its net debt to condense from $5.5 billion at the end of 2021 to $4.5 billion at the end of April following a period of sustained recovery in travel demand. ...Read more
Stock market
Headwinds to outnumber tailwinds in 2022
Headwinds are likely to outnumber tailwinds in 2022 as the world continues to readjust to the post-pandemic era, one expert has said. ...Read more
Stock market
Aussies can now net frequent flyer points by trading stocks
Superhero is looking to sweeten the deal for traders who are excited for the return of international travel. ...Read more
Stock market
Facebook debuts new name
Zuck gets meta. ...Read more
Stock market
2 big questions investors should ask as Australia reopens
Investors need to stop thinking about how to profit from the mineral sector’s struggles, and start looking at when the best time to ride the recovery will be. ...Read more
Stock market
Trading app popularity skyrockets as retail sector booms
In 2021, trading has never been easier for retail investors, meaning the number of users on trading applications has exploded to an all-time high. ...Read more
Stock market
ETF rush predicted to intensify
The Australian ETF sector advanced AU$6.3 billion in August to hit a new milestone, as its popularity among financial advisers soared. ...Read more
Wrapping up an eventful 2021
Listen now
What Omicron means for property, and are units right for first-time buyers? What is equity crowdfunding? Are industry super funds tapping into member funds to save their skins?
Listen now
Will housing affordability improve in 2022? Will buy now, pay later become the norm? Why are Aussies staying in failing super products?
Listen now
Who really benefits from crypto ETFs? How will the RBA respond to rising inflation? Could a mandate help address unpaid super?
Listen now
Stock market
Markets succumb to jitters as US CPI maintains strength
Following a slight drop of 0.2 per cent in the United States inflation rate, the latest US April consumer price index (CPI) data indicating higher than expected figures has triggered a fall in the US ...Read more
Stock market
Qantas forecasts return to profitability, announces ultra-long flights
Qantas expects its net debt to condense from $5.5 billion at the end of 2021 to $4.5 billion at the end of April following a period of sustained recovery in travel demand. ...Read more
Stock market
Headwinds to outnumber tailwinds in 2022
Headwinds are likely to outnumber tailwinds in 2022 as the world continues to readjust to the post-pandemic era, one expert has said. ...Read more
Stock market
Aussies can now net frequent flyer points by trading stocks
Superhero is looking to sweeten the deal for traders who are excited for the return of international travel. ...Read more
Stock market
Facebook debuts new name
Zuck gets meta. ...Read more
Stock market
2 big questions investors should ask as Australia reopens
Investors need to stop thinking about how to profit from the mineral sector’s struggles, and start looking at when the best time to ride the recovery will be. ...Read more
Stock market
Trading app popularity skyrockets as retail sector booms
In 2021, trading has never been easier for retail investors, meaning the number of users on trading applications has exploded to an all-time high. ...Read more
Stock market
ETF rush predicted to intensify
The Australian ETF sector advanced AU$6.3 billion in August to hit a new milestone, as its popularity among financial advisers soared. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
