Australian equities: A tale of two markets
Two markets operate within the Australian equity market:
- An efficient market in which it is near impossible to outperform; and
- An irrational market where outperformance is achievable.
Two markets operate within the Australian equity market.
- An efficient market in which stock prices reflect all the information affecting the value of each company. It is near impossible to outperform in this market.
- An irrational market in which little notice is taken of underlying value and information is more difficult to acquire. It is in this market that outperformance is achievable.
Market the First
The theory of efficient markets is that the price of each stock in the market reflects all the relevant information about that stock and thus the market trades at fair value. In Australian equities you could argue that the top 10 stocks trade in an efficient market. Each stock is so well covered by brokers, researchers and analysts that all the information there is to know about each of those companies is known by the market. The current share prices are therefore the best unbiased share price estimates of the ASX Top 10.
Market the Second
Outside the top 10, broker and research coverage starts to decline. Information about stocks becomes less accessible. Stocks trade, not on value but on irrational exuberance, rumour and sentiment. It is the mispricing in inefficient markets that presents investors opportunities to identify undervalued stocks to buy or overvalued stocks to sell.
Market the Australian Equities
Australian equities are a tale of two markets:
- An efficient market in the ASX Top 10; and
- An inefficient market outside the ASX Top 10.
Mispricing outside the ASX Top 10 is what every active fund manager is trying to take advantage of to outperform the benchmark.
It is easier said than done.
According to the latest S&P Dow Jones SPIVA® Australia scorecard , less than half of Australian equities funds outperformed the S&P/ASX 200 Index over one year. Over five years less than 30% outperform. Active managers, who charge fees to research and identify mispricing opportunities, are struggling to outperform the index over the long term.
Most active fund managers own the ASX Top 10 (see http://www.marketvectors.com.au/you-see-it-but-you-dont-believe-it/) and as it is an efficient market it is nearly impossible for fund managers to outperform if they hold weights similar to their benchmark index. By size, the ASX Top 10 is half of the S&P/ASX 200, which means that fund managers with similar allocations only have around 50% of their portfolio with which to identify mispricing opportunities in the inefficient Australian equities market.
The Market Vectors Australian Equal Weight ETF (ASX code: MVW), which currently equally weights the largest most liquid 73 stocks listed on ASX does include the ASX Top 10 but in MVW these make up only 14% of the portfolio. That means that MVW has 86% of its portfolio to take advantage of mispricing opportunities.
There has been much research supporting equal weight investing and why it outperforms market capitalisation benchmarks such as the S&P/ASX 200 Index. According to the research equal weighting outperforms because it has a contrarian trading strategy, better market timing and higher exposure to so-called ‘value stocks,’ meaning those stocks with a high book-to-market ratio.
In Australia MVW has outperformed the S&P/ASX 200 Index.
Over one year to 30 November 2015 MVW returned 6.05% (outperformance of 4.15%) and since inception it has returned 5.79% pa (outperformance of 3.84%).
Performance of MVW to 30 November 2015
Since Inception* (pa)
S&P/ASX 200 Index
*Inception Date is 4 March 2014
Source: Market Vectors Morningstar Direct, as at 30 November 2015. Results are calculated daily to the last business day of the month and assume immediate reinvestment of all dividends and are net of management costs but do not include brokerage costs of investing in MVW. The above performance information is not a reliable indicator of current or future performance of MVW, which may be lower or higher.
IMPORTANT NOTICE: This information is issued by Market Vectors Investments Limited ABN 22 146 596 116 AFSL 416755 as responsible entity ('MVIL') of the Market Vectors Australian Equal Weight ETF ('Fund'). MVIL is a wholly owned subsidiary of Van Eck Associates Corporation based in New York, United States ('Van Eck Global').
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 consider if it is appropriate for your circumstances. The PDS is available at www.marketvectors.com.au or by calling 1300 MV ETFs (1300 68 3837).
The Fund is subject to investment risk, including possible delays in repayment and loss of capital invested. Past performance is not a reliable indicator of current or future performance. No member of the Van Eck Global group of companies guarantees the repayment of capital, the performance, or any particular rate of return from the Fund.
Market Vectors® and Van Eck® are registered trademarks of Van Eck Global.
© 2015 Van Eck Global. All rights reserved.
CSIRO and Monash Superannuation Research Cluster support equal weighting here
London University's Cass Business school's findings are here
EDHEC Risk Institute findings are here
These all support our own research here