CONTRIBUTORS
Reece Birtles, CFA, GAICD
Head of Australian Equities
Matthew Davison
Portfolio Manager
For the ClearBridge Australian equities investment team, our overarching philosophy is that the Australian equity market is efficient over the long term, but in the short to medium term, behavioural biases can create dislocations, temporary mispricing and divergences from fair value. In recent times the impact of flows and indexing can be added to the list.
With many active managers recently underweight size and banks, asset owners often pose the question as to how investors are tackling these issues with an eye to both risk and alpha opportunities in the Top-20.
In the following paper, we outline some challenges investors are facing in their Australian Equity allocation, including the impact of increasing passive flows. We aim to address some of these issues and outline a unique solution from our investment team. We believe an active fundamental solution can offer significant risk-adjusted value-add relative to a traditional passive or systematic approach.
Key takeways:
- Index flows are reshaping market behaviour, driving reduced turnover and greater co-movement among Australia’s largest stocks. A growing share of daily trading in some names now stems from index-sensitive buying, distorting price discovery and amplifying reactions to minor earnings changes.
- The ClearBridge Australian Equities investment team have identified that controlling factor exposures to account for this index flow-induced pricing could be valuable to help keep investors’ core Australian equity exposures “true to label”, and offers the opportunity for active managers to exploit short-term dislocations.
- The ClearBridge Australian Active Insights strategy separates true fundamental insights from systematic style and sector biases. By neutralising exposures to value, momentum, beta, size and growth factors, the strategy isolates “pure alpha” and reduces the cyclicality that undermines many style-biased approaches.
- Case studies within the paper outline how the investment team have also customised the approach in order to accommodate client specific risk budgets or factor exposure gaps (such as between Top-20 and Ex-20 S&P/ASX stocks), or to help those investors wishing to retain flexibility to maintain portfolio style exposures to benefit from the rewarding episodes of strong positive Value-style performance.
- As a core, factor neutral exposure, the strategy’s unique source of ‘pure’ insight yields a coherent and effective portfolio that complements exposures to common style factors such as value, momentum and quality that may be prevalent elsewhere in a client’s portfolio.
Important Information
Franklin Templeton Australia Limited (ABN 76 004 835 849) is part of Franklin Resources, Inc., and holds an Australian Financial Services Licence (AFSL No. 240827) issued pursuant to the Corporations Act 2001. The ClearBridge Australian equities investment team, a division of Franklin Templeton Australia Limited, is operationally integrated under the “ClearBridge Investments” global brand, alongside ClearBridge Investments, LLC (“CBI”), and other ClearBridge entities indirectly wholly owned by Franklin Resources, Inc. Distribution of this material is issued and approved in Australia by Franklin Templeton Australia Limited.
This publication is issued for information purposes only and does not constitute investment or financial product advice. It expresses no views as to the suitability of the services or other matters described in this document as to the individual circumstances, objectives, financial situation, or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision.
Neither ClearBridge Investments, Franklin Templeton Australia, nor any other company within the Franklin Templeton group guarantees the performance of any Fund, nor do they provide any guarantee in respect of the repayment of your capital.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The distribution of specific products is restricted in certain jurisdictions, investors should be aware of these restrictions before requesting further specific information.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
Some of the information provided in this document has been compiled using data from a representative account. This account has been chosen on the basis it is an existing account managed by the investment team , within the strategy referred to in this document. Representative accounts for each strategy have been chosen on the basis that they are the longest running account for the strategy. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The data provided for this account may be different to other accounts following the same strategy. The information should not be considered as comprehensive and additional information and disclosure should be sought.
The information provided should not be considered a recommendation to purchase or sell any particular strategy / fund / security. It should not be assumed that any of the securities discussed here were or will prove to be profitable. It is not known whether the stocks mentioned will feature in any future portfolios managed by the investment team. Any stock examples will represent a small part of a portfolio and are used purely to demonstrate our investment style.
Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- The strategies mentioned may invest in derivatives (index futures) to obtain, increase or reduce exposure to underlying assets. The use of derivatives may restrict potential gains and may result in greater fluctuations of returns for the portfolio. Certain types of derivatives may become difficult to purchase or sell in such market conditions.
Risk warnings – Investors should also be aware of the following back-test risks.
- The back-test results presented in this document are based on simulated performance results. Please be aware these have certain limitations.
- Back-tested performance returns do not represent the impact of trading. The trades in the back testing have not been executed and may not fully reflect the impact of market factors such as liquidity.
- The investment team makes no representation that any account will or is likely to achieve returns similar to those illustrated as a result of the back testing presented.
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You may only reproduce, circulate and use this document (or any part of it) with the consent of Franklin Templeton Australia Limited.