The Mysterious Affair of 2016

The success of a crime novel, no matter how complex, is measured by its suspense, plotting and characters.  Many crime novels involve a plot twist which foils the reader’s expectations.  Agatha Christie’s novels were famous for them. In Lord Edgware Dies and The ABC Murders the criminal was the one who first called the detective.  In And Then There Were None the murderer had appeared to be one of the victims.

Agatha Christie’s sleuths Hercule Poirot and Miss Marple often unravelled their mysteries with the advice that “the simplest explanation is always the most likely.”

2016 has been the year of unexpected twists: Brexit, Trump’s victory, the ‘will-they-won’t-they’ rate decisions of central banks. This leaves investment markets feeling like a mystery.

Like Poirot and Miss Marple, investors should look for the simple and there is no investment process simpler than equal weight, where each stock in the portfolio is held in the same proportion.

The impact of equal weighting an Australian equities portfolio means that rather than having nearly 50% in just 10 companies, like a fund tracking the S&P/ASX 200 Accumulation Index (S&P/ASX 200), an investor has an equal exposure to each company in the portfolio.  The only equal weight Australian equities listed fund is the VanEck Vectors Australian Equal Weight ETF (ASX: MVW).

MVW currently includes 81 of the largest and most liquid ASX listed companies. As the chart below illustrates, compared to the S&P/ASX 200, MVW has less exposure to the largest thirteen stocks.  It also doesn’t invest in the 119 stocks in the long tail of the S&P/ASX 200 which tend to be rounding error in terms of performance of the market index.

Source: Factset, 31 October 2016

MVW’s remaining 68 holdings are strong Australian companies typically with experienced management teams, established brands and client bases, infrastructure and access to capital markets. Such companies can grow more quickly than their mega-cap counterparts, benefiting from flatter management structures, entrepreneurial drive and quick decision-making.  Importantly these companies also have much greater potential to be taken over than the largest thirteen stocks on ASX.

Allocating more to smaller size stocks rather than mega stocks has benefited MVW especially as commodities rose this year.

For the 12 months to 31 October 2016 the S&P/ASX 200 returned 6.11%.  Newcrest contributed the most of any individual stock to this performance, adding 0.66%.  Newcrest represents 1.03% of the S&P/ASX 200.  In MVW it represents 1.45%, and it added 1.14% to MVW’s performance of 10.88% over the same period.

Newcrest was not the biggest contributor to MVW’s performance.  That honour fell to Fortescue Metals contributing 1.69%.  In the S&P/ASX 200 Fortescue represents just 0.3% so it only added 0.46% to the market index’s performance.

The events of 2016 have provided investors an opportunity to assess their portfolio and its ability to absorb the impact of market shocks.  A measure called ‘drawdown’ is useful for investors in this assessment as it demonstrates both the depth of a fall from an historical peak and the pace of the recovery to a new peak. The maximum drawdown is the distance from the highest peak to the deepest valley. Investments that fall less and recover faster are more desirable.

The chart below shows the drawdown of MVW versus the S&P/ASX 200 since MVW’s inception. In summary:

• The maximum drawdown of MVW was 13.82% versus the S&P/ASX 200 18.00%
• MVW recovered from its previous low faster than the S&P/ASX 200.

Source: Morningstar Direct, as at 31 October 2016. Results are calculated daily to the last business day of the month and assume immediate reinvestment of all dividends. MVW results are net of management costs but do not include brokerage costs of investing in MVW. Past performance on is not a reliable indicator of future performance.

The success of an investment, no matter how complex, is measured by its performance.

MVW has outperformed the S&P/ASX 200 by 4.77% p.a. over the past twelve months returning 10.88% compared to 6.11%. Since its inception it has outperformed by 4.71% per annum.

Inception date is March 4, 2014.
Source: Factset, Bloomberg, VanEck, as at 31 October 2016. Results are calculated daily to the last business day of the month and assume immediate reinvestment of all dividends. MVW results are net of management costs but do not include brokerage costs of investing in MVW. Past performance on is not a reliable indicator of future performance.

The mystery is solved. MVW did it! …with the help of some miners.

For more information on MVW click here or call us on 02 8038 3300.

IMPORTANT NOTICE:

This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity of the VanEck Vectors Australian Equal Weight ETF (MVW) (‘Fund’). 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 and consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 3837. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the Fund.