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3 October 2024
Active fund managers are constantly seeking alpha, or excess portfolio returns above a specific benchmark. It’s a challenging and sometimes elusive goal, because they primarily achieve alpha by attempting to capitalise on market inefficiencies while weighing up the risks.
Few active managers can outperform every year given the number of external factors with potential to derail expectations. However, alpha is how active fund managers are measured. So they’ll typically strive for a high target, and aim to outperform more often than not.
Conversely, passive investments only target the benchmark. They’re low-cost, but they won’t shoot the lights out on investment returns.
This can create a dilemma for ETF (Exchange Traded Fund) investors. Neither option gives you everything you need in your portfolio. But what if there was a solution that offered the best of both worlds?
A typical investment portfolio might invest in low-cost passive funds at the core and allocate to high conviction active managers via satellite exposures. This balances the portfolio’s overall costs and risks, with the active ETF allocations aiming for alpha to accelerate returns.
However, there is an alternative. With Macquarie’s systematic active ETFs, you can seek to generate alpha at the core with an attractive management fee, plus a performance fee only when we beat the index*.
Systematic (or quantitative) investing is a data-driven approach to investing, combining behavioural science, finance and economic data with human intelligence. Its rigorous and repeatable model aims to deliver consistent financial outcomes above the index. Historically reserved for institutional investors, these actively managed systematic strategies can now be easily accessed via listed funds on the ASX.
Consistent returns are the holy grail of investing, because it means your portfolio is outperforming under different market conditions and across multiple time periods to provide stability. And as the returns compound, the wealth impact multiplies.
Let’s say your core allocations make up 70% of the portfolio, and a systematic active ETF is targeting (and achieving) 1% alpha above the performance and management fees. If you invested $100,000 in an ASX 300 passive index fund (which achieved the return of the index with a fee of 0.04% 10 years ago), you’d have $213,290 today. But if you invested that $100,000 in a fund that achieved outperformance of 1% of the index (also assuming a 0.03% management fee and 20% performance fee) and allowed the returns to compound, you would have $229,900 today – a remarkable difference of $16,610.
Over a longer timeframe, compounding would magnify the returns.
Past performance information above is to illustrate the effects of compounding only and is not a reliable indicator of past or future performance of any Macquarie fund.
Future results are impossible to predict. This graph does not display the past performance of any Macquarie fund and there is no promise or guarantee that MQAE or MQEG will achieve their investment objectives.
Source: ASX300 Accumulation Index (Index). Index fund returns above represent the return of the Index minus 0.04% management fee which is indicative of the lowest fee passive ETF available in Australia as at 25/09/2024. Index return +1% return above assumes Index return net of 0.03% management fee and a 20% performance fee.
On the surface, 1% alpha may not seem like much. However, when that alpha is consistent and compounds over long periods, things become interesting"
Blair Hannon, ETF Investment Strategist at Macquarie Asset Management
When investment returns are re-invested over a long period of time, and consistently generate additional returns, the end result is magnified. That is the power of compounding.
You need longevity and skill to make this strategy work. And that’s the advantage of Macquarie’s core equity active ETFs, which are managed by Macquarie Systematic Investments (MSI).
MSI’s dedicated in-house quantitative team use machine learning models to analyse significant amounts of data to build out over 1,000 alpha signals – such as price volatility and return on equity.
They then use 60-70 of these signals to predict alpha and risk, and select best stock positions across 300 ASX stocks or 1,400 global equities, depending on the specific strategy. Every week, the model analyses over 100million data points to build a finely tuned and diversified portfolio.
“The process is built around a tracking error of 0.5% to 1.5%,” explains Benjamin Leung, Head of Macquarie Systematic Investments. “This means stocks in the index are getting small bets above or below the index weight, with the highest weighting to one stock approximately 0.80% above its benchmark weight.”
These small bets give MSI the ability to seek to outperform by a specific amount, such as 1%, and also manage risk on the downside. By not taking big bets across a small number of stock positions, the ability to deliver consistent alpha becomes more manageable.
Due to the systematic approach, MSI can effectively analyse every stock in the relevant investible universe across many different dimensions aiming to avoid concentration risks that can come with a purely fundamental approach, and reduces dependency on an individual fund manager’s style or preferences.
While Macquarie’s core equity active ETFs launched in May 2024, MSI’s approach has been proven over many market cycles – with long-term, consistent returns for leading super funds and institutions for more than 30 years.
“We’re confident these alpha targets are achievable over the long term, with over $40 billion in assets under management following the systematic process,” says Leung.
The objective of the core equity active ETFs is to outperform the index by an average of 1% per annum (before fees), over rolling five-year periods.^
Macquarie’s core equity active ETFs have a competitive management fee, plus a performance fee only when the strategies beat the index.*
Hannon says that is what makes these active ETFs a cost-effective core allocation, aligning Macquarie’s goals with its investors: every decision is designed to drive stable, consistent wealth creation.
So instead of treating your core investments as a ‘set and forget’ passive allocation, why not think ‘index-plus’? And remember, over the long-term, markets tend to reward the patient and consistent investor.
Learn more about Macquarie’s core equity active ETFs here.
^There is no assurance this target will be achieved. It should not be relied upon to make predictions of actual performance, is not a guarantee, projection or prediction, and may not be indicative of future results
*Please refer to the Product Disclosure Statement for further information on the fees and costs.
All investments carry risk. Different investments carry different levels of risk, depending on the investment strategy and the underlying investments. Generally, the higher the potential return of an investment, the greater the risk (including the potential for loss and unit price variability over the short or long term). The risks of investing in the Funds include:
Investment risk: The Fund seeks to generate higher income returns than traditional cash investments. The risk of an investment in the Fund is higher than an investment in a typical bank account or term deposit. Amounts distributed to unitholders may fluctuate, as may the Fund’s unit price. The unit price may vary by material amounts, even over short periods of time, including during the period between a redemption request being made and the time the redemption unit price is calculated.
Market risk: The investments that the Fund has exposure to are likely to have a broad correlation with share markets in general. Share markets can be volatile and have the potential to fall by large amounts over short periods of time. Poor performance or losses in domestic and/or global share markets are likely to negatively impact the overall performance of the Fund.
Manager risk: There is no guarantee that the Fund will achieve its performance objectives, produce returns that are positive, or compare favourably against its peers, or that the strategies or models used by the Investment Manager will produce favourable outcomes.
More information on the risks of investing in the Fund is contained in the Product Disclosure Statement, which should be considered before deciding to invest in the Fund.
Important information
The Macquarie Core Australian Equity Active ETF and the Macquarie Core Global Equity Active ETF is designed for consumers who: are seeking capital growth and income distribution, are intending to use the Fund as a core component, minor or satellite allocation within a portfolio, have a minimum investment timeframe of five years, have a high or very high risk/return profile for that portion of their investment portfolio, and require the ability to have access to capital within one week of request.
The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.
The Macquarie Core Global Equity Active ETF is a separate class of units in the Macquarie Core Global Equity Fund (ARSN 674 553 201). A separate class of units is not a separate managed investment scheme.