As we approach InvestSense's 10-year anniversary at the end of October, we've been exploring key trends and themes that have recently impacted markets and managers, reflecting on whether they are the culmination of a trend that has been unfolding throughout InvestSense’s entire existence. Looking ahead to the next decade, two issues have risen to the top of our research agenda: 1) The underperformance of active managers and what’s driving it, and 2) The major long-term economic and market themes that will shape the investment landscape in the 2020s and 2030s.‍

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The Underperformance of Active Managers and What’s Driving It‍

Regarding active manager performance, the data shows many Australian equity managers are under pressure and seem to be leaning against some of the trends the market has been rewarding. For example, the vast majority of analysts have "sell" ratings on Commonwealth Bank (CBA) with price targets 40% below the current share price, yet the stock continues to defy gravity. Digging into the top 20 Australian equity managers by AUM, we found large underweights to the financial sector and slight overweights to materials, healthcare and, in some cases, energy or REITs.

Outside the top 10 index weights, popular overweight positions include stocks like Carsales.com, ResMed, Aristocrat Leisure, and Xero. However, in aggregate, active managers appear to be fighting the prevailing market momentum. Many are standing firm on valuation principles, particularly in the financial sector, while the market rewards sectors moving in the opposite direction. While some managers experienced brief outperformance during the volatility of 2022, the longer-term trend has been underperformance, especially during the QE-driven markets of the 2010s and the more recent growth/tech-led markets. Over the last year REITs and banks have outperformed energy, materials and some healthcare by up to 70%.  

This polarisation has been even more obvious trendsglobally, with many managers underweight the U.S. and tech sectors that have led the market to an even greater degree. While valuations in hot areas of the market may be stretched by many traditional metrics, flows and liquidity seem to be dominating over fundamentals. Mammoth industry super funds and systematic flows are overpowering price signals and potentially pushing markets to extremes. The key questions we are grappling with:

- What else are active managers overweighting outside the top stocks? More mid and small caps?

- Are industry super and index flows supporting segments like mega-cap tech and lifting the overall market?

- How much are retail flows, leverage and derivatives exacerbating momentum and volatility?

- Will value eventually reassert itself or is this time truly different? How should managers adapt?

We don't have all the answers yet, but these are some of the key issues we're researching and discussing with managers. We'll share more findings and insights with you as we uncover them.‍

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The Long-Term Economic and Market Themes Shaping the Next Decade‍

Bigger picture, as we look ahead to the next decade, we're looking forward to global economist Andrew Hunt visiting us in Australia at the end of September. Andrew has identified 10 key long-term themes he believes will define the economic and investing environment in the decade ahead, many of which are especially relevant for Australia. They are:

1. Asia's rising power and economic model shifts

2. Private debt and non-bank credit boom

3. Transformation of the Anglosphere housing and mortgage model

4. Demographics and the pension saving/spending life cycle

5. The energy transition and green investment boom

6. AI, automation and the future of work

7. Supply chain restructuring and resilience

8. Fiscal stimulus and the expanding state

9. Inflation/deflation tug-of-war and regime change

10. New monetary policy toolkit and financial repression

We'll be taking Andrew around the country to discuss these themes with our clients in more detail. We believe understanding these long-term trends will be crucial for building robust, future-proof portfolios. We'll also be publishing a series of white papers correlating Andrew's long-term themes with our 10-year return forecasts and valuations across assets.

It's shaping up to be an insightful September and fourth quarter as we reflect on the decade past and look ahead to the future. As always, we'll keep you apprised of our latest thinking and analysis.