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Great minds think alikeRussell’s Select Holdings Strategy – a ‘novel’ approach to choosing high-performing stocks Four booklovers are discussing their favourite Jane Austen novel. One likes a good romance with a bit of sexual politics thrown in. Another likes witty dialogue. A third is turned on by menace and darker images. And the fourth is obsessed by interrelationships. They all choose Emma as their favourite Austen novel. If four readers with distinctly different likes could all choose Emma, it provides a strong argument for it being the novelist’s best work. In much the same way, this philosophy can be applied to selecting stocks. Say you had four fund managers, each with their own investment style, all choosing the same stock. It might be argued that this stock will outperform others in a portfolio and, in turn, provide additional alpha (i.e. the return above benchmark) to a fund. This simple yet untapped concept is just one innovative way in which Russell is seeking to generate higher returns. Historical studies conducted by Russell in both the US and Australia to check the viability of this strategy revealed that over a 10-year period such stocks did indeed outperform by two to six times those that are uniquely chosen. More intelligence The question is why? The simplest explanation is that there is more information and intelligence about the stock than if it had only been recommended by the one fund manager. Fund managers all choose their favourite stocks differently. So when you have more than one fund manager reach the same decision, then there is a greater richness to that information. For instance, one fund manager may have chosen the stock on the basis of its balance sheet while another on earnings per share. By choosing such stocks Russell is building on the managers’ best ideas. And intuitively it must make for better investment decisions. Obviously its success will also rest with the skills of the multi-manager – with their depth of manager knowledge and the ability to identify the securities the managers hold in common. Increase the weighting Russell is the first financial services provider in Australia to offer investors the opportunity to increase returns using such a concept. Called the Select Holdings Strategy, its method is to increase the weighting in those stocks that have been recommended by more than one of its fund managers. So when two or more managers with different investment styles choose the same security, it raises a buy flag for the Russell portfolio manager. A quantitative proprietary model is then used to rank these popular stocks and only those with the highest confidence results are chosen for the Select Strategy. Some 5% of the Russell Australian Shares Fund is dedicated to the strategy.
Additional alpha Active management is the practice of trying to achieve returns higher than the fund’s benchmark (or index). If successful, the fund’s total return over and above the index return is called an excess return (or alpha). The Select Holdings Strategy increases the fund’s exposure to around 15 commonly favoured stocks in an attempt to create additional alpha.
As a result, it is a relatively punchy portfolio with much higher active risk – and potentially much higher excess returns – than a regular fund. The need to create additional alpha is even more important these days as changing environmental conditions suggest that we are unlikely to continue seeing double-digit growth in the market. And that’s where it pays to be selective.
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Achieve is issued by Russell Investment Management Limited (RIM), ABN 53 068 338 974, AFSL 247185. In preparing this information we haven’t taken into account your own personal circumstances, including what you want and need for your financial future. It is important for you to consider these matters and also to obtain and read the relevant PDS before you decide whether to acquire or to continue to hold a product. Go to www.yoursupersolution.com.au to download a PDS. Interests in Russell SuperSolution are issued by Total Risk Management Pty Ltd.
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