We are pleased to provide an update on the performance of our Australian and global founder company strategies. Our Australian strategy delivered a return of 9.4% in the month of April, above the benchmark return (3.9%), following a period of under-performance in the March quarter. The performance of the strategy’s largest positions in April were as follows: Reece (18.3%), Fortescue Metals (13.0%), Afterpay (15.9%), Wisetch Global (8.2%) and Nearmap (5.5%). In the past six and twelve months, the strategy has produced out-performance of 0.5% and 34.6% respectively.
The global strategy earned a return of 4.5% (AUD) for the month, above the benchmark return (3.2%). The strategy’s largest positions include MarketAxess, DR Horton, Fraser Group, Masimo Corporation, Starbucks and Microsoft. In the past six and twelve months, the strategy has produced relative returns of -1.4% and 5.1% respectively.
Stock volatility
Aggregate stock market volatility fell to below 8%pa in April, low by historical standards and a common pattern during episodes of strong market sentiment. Nonetheless, the decline in market wide volatility tends to conceal the cross-sectional variation in the past year. We have developed a model of single stock volatility and found that over the past 12 months, the three key drivers are size, market valuation and sector that a company is located in.
As expected, smaller stocks are associated with higher volatility; controlling for price to book ratio and sector, a 1% increase in assets translates into a decline in annualised volatility of 9 percentage points. Interestingly, volatility is higher for value stocks - notably those trading close to parity with net assets - than for growth stocks. A 1% fall in a company’s price to book ratio is associated with a rise in stock volatility of 5.6 percentage points. And controlling for size and valuation, stocks that belong to the real estate and consumer staples sectors exhibit the lowest volatility, while basic materials stocks have the highest volatilities.
The chart below contains a list of ten stocks with the highest residual stock volatility and ten stocks with the lowest residual stock volatility based on our model estimates. The high group are those whose actual volatility lies well above the model’s predicted volatility. The large differences between the predicted and realised volatilities reflect in part the fact that systematic models of single stock volatility cannot account for the release of prospective company specific news.
