Risk defined

losing money or underperforming the market?

Monash Investors’ definition of risk…

In line with our ‘absolute return’ objectives, we view risk as losing money. We are not interested in achieving ‘relative returns’ against stock market indexes, but in creating wealth by investing in compelling stocks (long and short) that meet our high return hurdle. Our approach means we are not forced to own stocks just because they form a major component of an index – of course, we can purchase these stocks, but only when they offer a considerable amount of upside (long) or downside (short).

Warren Buffett defined this well when he said that, ‘Rule No.1: Never lose money, Rule No.2: Never forget rule No.1’ This is a key component of how we think about risk management too.

The market’s definition of risk

Unlike Monash Investors, the majority of mainstream Australian equity managers’ view risk as the volatility of their returns (standard deviation) measured against a certain stock market index i.e. their benchmark. Because of this, these managers will often own stocks that they may not even like because they do not wish to deviate too far away from the index they are tracking – these managers are called ‘benchmark aware’. Deviating too far away from the index would be a business risk, if they underperform for a long enough period. So, regardless of the cycle or the valuations, they will always own banks and resources because of how much these sectors make up of the major indexes components.

With this view, if the index they are tracking falls -25% and the manager falls by only -20%, they would consider that they have done a very good job for their investors. But we beg to differ, as would most sensible investors.

All investments carry risk. Whilst it is not possible to identify every risk relevant to your investment, we have provided details of the risks that may affect your investment is in the Fund’s product disclosure statement (PDS).

What’s the difference between most fund managers stocks – very little.
Ours are vastly different.

As an example of this benchmark aware approach, the table below highlights the top ten positions of three of Australian largest equity funds versus a commonly used index. You will note that the portfolios look remarkably similar to the benchmark composition, with very small variance. This table highlights how benchmark focused these managers are.

 

Top 10 StocksS&P/ASX200 Index
View source
Manager A
View source
Manager B
View source
Manager C
View source
1CBAANZCBACBA
2WBCBHPWBCWBC
3BHPCBAANZNAB
4ANZWBCBHPBHP
5NABQantasNABRIO
6CSLCSLWesfarmersCSL
7WesfarmersNABCSLANZ
8TelstraTelstraMacquarieWoodside
9WoolworthsAmcorQBEAristocrate
10MacquarieRio TintoOriginWesfarmers

 

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