Australia: Who’s up when the investment Gods frown?

After enjoying strong above average returns from the Australian sharemarket over the past two calender years of 28.0% (2004) and 14.6% (2003), the past two months have seen a change of fortunes in Australian equity market returns.

Navigator's research manager, Stuart Fechner said the Australian equity market (measured by the S&P/ASX 200 Accumulation Index) has provided negative returns in both March and April of 2005. This is the first time in over two years we have experienced consecutive months of negative returns.

“The last time we saw this occur was in late 2002/early 2003 when we experienced three consecutive months of negative returns, December 2002 – February 2003, within the Australian sharemarket,” added Stuart.

Navigator Research has conducted assessment into which Australian equity funds are the better performers when the sharemarket is negative.

The following table lists the 10 Australian equity funds offered by Navigator with the strongest record of adding value in months where the S&P/ASX 200 Accumulation Index has provided a negative return.

Past performance should not be taken as an indication of future performance.

“How do managers perform when the investment Gods are not smiling?” Stuart questioned.

Navigator Research's assessment was to determine which managers tend to hold their own in negative market conditions.

Assessment conducted by Navigator Research looked at the five-year period (60 months) to the end of March 2005, in relation to the Australian sharemarket as measured by the S&P/ASX 200 Accumulation Index. Over this five-year period the market has provided a positive return in 37 of the 60 months and a negative return in 23 of the 60 months.

In looking at the attached table, two key observations can be made.

“The Investors Mutual Australian Share Fund during the five year period has a perfect record of outperforming the index on every occasion when the market provided a negative return. This is a terrific track record,” Stuart said.

“It's also worth noting the strong representation of ‘value managers' occupying six positions within this top ten,” added Stuart

Value oriented managers focus on the mis-pricing of investments. They typically purchase stocks that are out of favour with the market or cheaply priced due to largely short-term influences. The stocks are held until a price correction occurs and usually have relatively low P/E ratios.

Negative market performance commonly occurs due to a fall in price of stocks perceived as overvalued or that may have equally been driven up due to strong momentum and related market confidence. Given that value managers predominantly hold stocks they view as undervalued, it is these type of stocks that tend to hold their own or at least ‘fall less' than many other stocks and hence the broader market.

“Seeing a good number of value managers listed within the top 10 as performing well when the market is negative is pleasing as it tends to indicate that they are true to label in adhering to their stated ‘value' investment philosophy,” said Stuart.

“In this regard Investors Mutual are one of the deeper value managers,” Stuart added.

“The only GARP (Growth At a Reasonable Price) style manager to make the top 10 list was Portfolio Partners High Growth Shares Trust*. Unlike other funds in the top 10 list it has the capacity to short sell stocks within its investment strategy. This means not only can an increase in returns be achieved when a share price rises, but it also provides the opportunity to boost returns when a share price falls,” said Stuart.

Fund manager investment style can be an important influence on fund performance. It is important, however, to consider a range of different investment styles and approaches when constructing an investment portfolio. In addition to selecting an investment style or combination of styles, a high degree of confidence in the quality of the investment team and related investment process is important.

“Investors should seek the advice of a financial adviser who understands the different investment approaches and which approach is employed by different fund managers. This is the best way to ensure that an appropriately diversified portfolio can be constructed that is in line with an investors risk profile and needs,” Stuart said.

It may be argued an investor's focus and scrutiny of their investments tends to differ between periods of strong and weak, or in fact negative, returns.

“When markets are performing strongly investors tend to pay less attention to whether a manager has outperformed or under performed. Most investors would be happy to see a return of 20% from their fund in any given year, no questions asked, regardless of how this compares to the actual market performance,” said Stuart.

“Performing well when the market is negative is not the be all and end all of investment success, however, having some allocation to such a fund will assist in providing some stability to the overall portfolio in times when the market is negative. And it's usually in these situations when investors tend to be most nervous regarding their investment portfolio and ask the most questions,” said Stuart.

* The Portfolio Partners High Growth Shares Trust is managed by a company which, like Navigator, is also owned by Aviva Plc.

Stuart Fechner is available for interview on 0407 839 080

For further information, please contact:
Simon Morgan, Group General Manager, Public Affairs
(03) 9829 8892
0407 966 632

Notes to editors:

• Aviva Australia is a group of two specialist financial services companies: Navigator and Norwich Union Life Australia Ltd. Portfolio Partners is the Australian funds management arm of Aviva plc. Through these companies we provide products and services in the areas of wealth creation and wealth protection for more than 300,000 customers throughout Australia.
• Globally, Aviva Australia is part of Aviva plc, the world's fifth largest insurance group, the largest insurer in the UK and one of the top five life companies in Europe. Aviva was formed in May 2000 through the global merger of CGU plc and Norwich Union plc.
• Aviva is a leading provider of life and pensions products to Europe and has substantial businesses elsewhere around the world. Its main activities are long-term savings, fund management and general insurance. It has premium income and investment sales from continuing operations of A$74 billion, and more than A$592 billion of assets under management (as at 17January 2005). The group has more than 51,000 employees and 30 million customers worldwide.
• The information in this document reflects Navigator Australia Limited's ('Navigator') understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information given in this document is of a general nature and has not taken into account the investment objectives, financial situation or particular needs of any particular person and it is not a substitute for professional advice. Applications to invest in a financial product issued by Navigator, or any of its related entities, must be made by completing the application form attached to the applicable Product Disclosure Statement ("PDS"). A PDS is available from Navigator or your financial adviser. Before making an investment decision on the basis of the information above, a prospective investor needs to consider, with or without the assistance of a professional adviser whether the information is appropriate in the light of their particular investment needs, objectives and financial circumstances. Aviva does not receive any remuneration in relation to the provision of information available from this press release which is of a general nature only.