• Australian Equity

    The Smart Contrarian

    Brett Liddell, CFA
    28 November 2017
     

    Equal weighting - an implicit contrarian strategy

    VanEck Vectors Australian Equal Weight ETF (ASX: MVW) is contrarian for two reasons:

    1. Contra-trading - Each quarter MVW rebalances its holdings so that all stocks are equally weighted.  This process involves:

    • selling stocks that have risen in price since the last rebalance; and

    • buying stocks that have fallen since the last rebalance.

    2. Contra-weighting - MVW has less exposure to mega-caps and higher exposure to large- and mid-cap stocks.

    Contra-trading

    Here is an example from MVW's portfolio: Qantas.  In 2015 Qantas was implementing a cost cutting regime.  Externally, the oil price was high and Qantas was under threat from domestic and international competitors. 

    During 2015, MVW was accumulating Qantas shares.  Since then, the price of oil has fallen, the carbon tax was cut and domestic and international competition has abated.  Qantas is now firmly in the black, returning money to shareholders. 

    Contrarian MVW Qantas trades

    In the past year Qantas has accounted for ~1.31% of MVW's portfolio and has contributed 1.06% to MVW's performance for the year to 31 October 2017.  Alternatively, Qantas only represents ~0.56% of the S&P/ASX 200 so has only contributed 0.42% of that index's return. 

    MVW's contra trading strategy has contributed positively to performance.

    Contra-weightings to other fund managers

    Herd-like stock selection can only give you herd-like performance. Most Australian investors' portfolios are dominated by the largest stocks listed on ASX.  Almost all large-cap Australian equity fund managers are benchmarked to the S&P/ASX 200 or 300 and due to fear of high tracking error are often compelled to take herd-like positions.

    Below are the top five stock positions in the S&P/ASX 200, compared to three of the largest active managers and MVW. Stocks common to the S&P/ASX 200 Top 5 are highlighted in orange.

    You can see that the three equity fund managers hold the largest stocks on ASX, in similar proportions held by the S&P/ASX 200.

    Contrarian top 5

    Compared to the S&P/ASX200, MVW is underweight only the largest fourteen stocks and 111 stocks in the long tail of the S&P/ASX 200.   The 65 companies which MVW is overweight can be former small and mid-caps that have grown, or large and mega companies that have fallen in size. Importantly these companies have much greater potential to be taken over than the top fourteen.

    Contrarian MVW stock weights

    MVW's contra-weighting strategy has also resulted in outperformance.

    Contrarain performance


    IMPORTANT NOTICE:

    This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck') as responsible entity of the VanEck Vectors Australian Equal Weight ETF (MVW) (‘Fund'). This is general information only and not financial advice. It is intended for use by financial services professionals only. It does not take into account any person's individual objectives, financial situation nor needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser and consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 3837. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the Fund.