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Auscap Asset Management > Uncategorized > Quarterly Newsletter – The Right Conditions To Back Active Versus Passive Investing

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The Lonsec Rating (assigned October 2018) presented in this document is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445. The Rating is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial product. Past performance information is for illustrative purposes only and is not indicative of future performance. It is not a recommendation to purchase, sell or hold Auscap Asset Management Limited’s product, and you should seek independent financial advice before investing in this product. The Rating is subject to change without notice and Lonsec assumes no obligation to update the relevant document following publication. Lonsec receives a fee from the Fund Manager for researching the product using comprehensive and objective criteria.

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Lonsec Disclaimer

The Lonsec Rating (assigned October 2018) presented in this document is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445. The Rating is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial product. Past performance information is for illustrative purposes only and is not indicative of future performance. It is not a recommendation to purchase, sell or hold Auscap Asset Management Limited’s product, and you should seek independent financial advice before investing in this product. The Rating is subject to change without notice and Lonsec assumes no obligation to update the relevant document following publication. Lonsec receives a fee from the Fund Manager for researching the product using comprehensive and objective criteria.

For further information regarding Lonsec’s Ratings methodology, please refer to Lonsec’s website at: http://www.beyond.lonsec.com.au/intelligence/lonsec-ratings

Auscap Asset Management Limited, its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information contained in the Lonsec Rating, or for any errors or omissions.

By clicking ACCEPT below you acknowledge and agree to the terms and conditions set out above and confirm that you are an Australian Wholesale investor as defined by the Corporations Act 2001 (Cth).

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Quarterly Newsletter – The Right Conditions To Back Active Versus Passive Investing

July 18, 2024

Welcome to Auscap’s July 2024 Newsletter titled The Right Conditions To Back Active Versus Passive Investing

Passive investing is currently all the rage. This is in large part due to the strong performance of the US stockmarket, which very few active managers have outperformed in recent years, and which passive investors can get exposure to at a low cost through an ETF. At the time of writing the S&P500 total return index is up 18.6% year to date. It has annualised 15.6% over the last 5 years. The largest S&P500 ETF, the State Street SPDR S&P500 ETF Trust, charges a fee of just 0.0945% per annum. What’s more, according to Morningstar less than 20% of active asset managers in the US have outperformed the S&P500 in 2023 and year to date in 2024. What’s going on? Why has passive investment performance been so strong? And does this void an argument for backing active asset management? In this newsletter, we assess the relative performance of passive versus active asset management across the US and Australian stockmarkets in recent years to understand what drives returns from equities over time. We also discuss the investment thesis around one of our portoflio holdings, ResMed. We also detail the performance and portfolio positioning of the Auscap Funds in June 2024.

CPD Points are available for this activity. Please see below.

Auscap Newsletter - July 2024

Multiple Choice Test - July Quarterly Newsletter 2024

Learnings Outcomes: In this newsletter, we assess the relative performance of passive versus active asset management across the US and Australian stockmarkets in recent years to understand what drives returns from equities over time. This activity meets the guidelines for qualifying CPD, and has been accredited for continuing professional development by the Financial Advice Association of Australia but does not constitute FAA’s endorsement of the activity. 0.5hr CPD is available for this activity.

Question 1(Required)

The largest weights of the S&P500 Index are currently (as at the date of the newsletter):

Amazon (6.8%), Apple (6.5%), Alphabet (6.2%), Netflix (6.0%), Microsoft (5.8%) and Tesla (5.4%)

Nvidia (8.5%), Amazon (7.3%), Microsoft (6.5%), Alphabet (5.2%), Apple (4.1%) and Meta (3.0%)

Microsoft (7.2%), Apple (7.0%), Nvidia (6.7%), Alphabet (4.3%), Amazon (3.8%) and Meta (2.4%)

Apple (10.3%), Alphabet (9.7%), Meta (9.3%), Nvidia (8.7%), Amazon (8.5%) and Microsoft (8.1%)

Question 2(Required)

The ideal circumstances for a passive investment in a market capitalisation based, or size weighted, index is:

When the biggest companies in that index are growing their earnings faster than most other companies in the index.

When all companies in the index are growing their earnings at the same rate.

When the smallest companies in that index are growing their earnings faster than most other companies in the index.

When the Price to Earnings ratios of the companies in the index are declining.

Question 3(Required)

The following statement is true:

The large Australian banks are unlikely to see their earnings decline on a go forward basis.

The large Australian banks are likely to maintain their earnings on a go forward basis.

The large Australian banks are likely to see earnings growth on a go forward basis.

The large Australian banks are unlikely to see material earnings growth on a go forward basis.

Question 4(Required)

It appears that steel, and hence iron ore, consumption in China peaked in 2020 which is significant because:

China is now focusing its commodity consumption and production on other commodities.

The world’s steel production has materially increased since then.

In 2023, China accounted for 53.9% of the world’s steel production.

India has now become the world’s largest producer of steel.

Question 5(Required)

Over the next few years, it is expected that:

There will be increasing demand, and declining supply, for iron ore leading to increasing earnings for the iron ore majors.

Demand and supply of iron ore will remain steady, as will earnings for the iron ore majors.

There will be increasing supply, and declining demand, for iron ore leading to declining earnings for the iron ore majors.

There will be a material increase in the earnings for iron ore majors.

Question 6(Required)

The long term return from investing in equities should:

Always be positive.

Be stagnant given inflation and macroeconomic concerns.

Reflect market sentiment.

Approximate the sum of earnings growth and dividend yield over time.

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The Auscap Long Short Australian Equities Fund received a ‘Recommended’ rating from Zenith Investment Partners (June 2024)¹

The Auscap Long Short Australian Equities Fund received a ‘Recommended’ rating from Lonsec Research (October 2023)²

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Zenith Disclaimer

The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (ASX0001AU assigned June 2023; ASX6179AU assigned February 2024) referred to in this piece is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual, including target markets of financial products, where applicable, and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at Fund Research Regulatory Guidelines.

Auscap Asset Management Limited, its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information contained in the Zenith Product Assessment, or for any errors or omissions.

This report for the Auscap Long Short Australian Equities Fund is intended for wholesale clients, AFSL holders or their authorised representatives, by accessing this report you are confirming that you are a wholesale client or you either hold an AFSL or are an authorised representative.

Disclaimer

* Important: This information is noted for general information purposes only. Auscap Asset Management Limited ACN 158 929 143, AFSL 428014 (Auscap) is the responsible entity of the Auscap Long Short Australian Equities Fund (ARSN 615 542 213) (the Fund). Before deciding whether to acquire units in the Fund, a prospective investor should fully review the information, the disclosures and the disclaimers contained in all relevant Fund documents, including in particular the Fund’s disclosure document – the Product Disclosure Statement (PDS) – or any supplement to that document, and consider obtaining investment, legal, tax and accounting advice appropriate to their circumstances. A copy of the Fund’s PDS is available on request or at www.auscapam.com/auscap-fund/pds/. A copy of the Target Market Determination for the Fund, prepared in connection with the Design and Distribution Obligations, can be obtained on request or at www.auscapam.com/ddo/.