UBS says there are a number of anomalies that affect the Australian market and help drive outperformance for participants such as fund managers and superannuation funds.
The investment bank says large cap active managers have beaten the index by 1.51% pa while small cap managers have outperformed the small cap benchmark by 7.67% pa between 1995 and 2015.
How do they do it?
In this piece, we recap UBS' insights on the opportunities that Australian money managers capitalise on. While these aren’t exactly game changers for your trading and portfolio, you should at least be aware of them.
As the investment bank says, “there’s no point trying to swim against a riptide.”
Australia's franking system has incentivised companies to pay dividends and offer dividend reinvestment plans in order to maximise the distribution of franking credits to shareholders, according to UBS.
"The presence of franking means that dividend income accounts for a high proportion of total returns earned by Australian investors," the analysts said. "Dividend income return has accounted for 46% of the total returns achieved by the ASX 200 since May 1992 compared to 23% of the total returns achieved by the S&P 500 in the US, where there is no dividend imputation."
Why does franking matter: UBS found that fully franked or partially franked stocks added value to the benchmark in 2000 and 2001 and from 2010 to present.
"They have kept up with the market in most of the other years. Unfranked stocks lost value from 2000 to 2011 but have rebounded since," the analysts said.
'It appears that since dividends are such a large part of the return to investors in Australia, share prices often rally as investors are attracted to companies that pay significant dividends," says UBS.
A study of median total returns of ASX 200 stocks 45 trading days before and after their ex-dividend date against the total return of the ASX 200 from January 2013 to August 2017 shows a 1.5% rise in share price over the corresponding period.
A simple strategy: "These stocks perform in line with the market after the ex-dividend date. A simple strategy could be to buy stocks in lead up to the ex-dividend date."
UBS observed several seasonal and historic trends that investors should be mindful of. Here are the highlights:
Tax season: The ASX 200 has historically flagged a decline in June and a rebound in July. A basic market-timing strategy that shorts the ASX 200 in June and goes long in July would be 2.2% per annum, according to the analysts.
Large vs. mid vs. small caps: The tax selling effect seems to be driven by small and mid-caps, while large caps were unaffected, according to UBS. Whereas all size bands appeared to perform well through reporting season.
Momentum outperforms: Momentum delivers a large proportion of its returns in just three months: June (+3.3%), November (+1.5%) and December (+1.9%). This refers to average monthly performance between April 2000 and August 2017
UBS says the oligopoly effect explains how:
Large companies outperform small companies in sectors dominated by oligopolies.
Small caps can trade at a premium in sectors not dominated by oligopolies.
Australia has oligopolies in Financials, Materials, Energy and Staples.
These sectors flag a small cap discount and/or a large cap premium.
"Our research suggests that Australian fund managers targeting the small cap premium should focus on Industrials, Health Care and Consumer Discretionary as these sectors are not oligopolistic and have historically exhibited a small cap premium," the analysts said.
"Small cap firms are also likely to do well in sectors where the dominant players are being disrupted, such as Telecoms."
The rise in passive investing and bench-marking is likely to increase the magnitude of how stocks trade before index inclusions and deletions, according to UBS.
The stocks that are set to be removed from the Index experience a significant discount before the effective date. There is the tendency for some stocks to experience a significant rebound post exclusion.
While stocks that join the index tend to trend higher, up until the inclusion date.
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