The S&P/ASX 300 Accumulation index gained 12.6 per cent over the 12 months to 30 September 2019. This decent return masked underlying volatility, with the index falling -8.4 per cent in the December quarter, before rebounding 22.9 per cent over the remainder of the period.

This volatility has been underpinned by heightened macro and geopolitical uncertainty; Brexit, US-China trade, doubts over the trajectory of Chinese and US economic growth, a surprise result in Australian Federal elections, and weakness in domestic housing and consumer demand.

This posed some challenges for investors, as did thematic dispersion within the market. As interest rate expectations and bond yields have fallen, growth and defensive yield stocks have surged over the last 12 months, on top of an already impressive degree of outperformance over the last five years. At the same time, doubts about the economy have weighed heavily on cyclicals. As a result, the valuation gap between growth and value stocks reached extreme levels, by historical standards, during the year.

Our investment approach looks to capture stock-specific insight, rather than take heroic positions on thematic drivers. This strategy has shown its mettle in this environment; the Funds have typically done well in periods where thematic uncertainty has been high and sentiment has shifted quickly, compared to more style-based peers.

Nevertheless, valuation extremes − coupled with volatility and rapid thematic shifts − made it a tough market for active investors. This is reflected in the fact that our Pendal Focus Australian Shares Fund finished behind the index for the 12 months and yet still ranked in the second quartile in the Mercer Australian Equity Long Only sub-universe. The other broad-cap, mid-cap and-small cap flagship funds also finished behind the index for the period. The listed property funds had a strong year, outperforming the index and finishing in the first quartile of their peers.

The best ideas Pendal Focus Australian Shares Fund and the Pendal Midcap Fund both continued to attract net inflows over the period.

The Pendal Ethical Share Fund and Pendal Sustainable Australian Share Fund also saw net inflows, demonstrating the increasing role that responsible investment is playing in market. In this vein, the Australian Equity boutique will be seeking to collaborate further with Regnan, the responsible investment research firm, which Pendal Group bought in its entirety in 2019.”

Mandate restructuring at Westpac did result in institutional outflows during the period. However, there was also a number of new wins on the institutional side, with new inflows into broad-cap mandates. This went some way to offsetting the outflow from Westpac.

Looking forward, geopolitical and macro uncertainty looks set to persist, with ongoing US-China trade negotiations leading into a US presidential election. At the same time, the domestic economy remains soft, but with signs that stimulus measures such as tax and interest rate cuts − and the potential for fiscal stimulus − will provide some support.

We believe our approach is well placed to navigate this environment. These issues drive uncertainty, but it is uncertainty, which drives mispricing − and opportunities for investors willing to do the work and understand the outlook for specific companies.

In keeping with our approach, we are not positioning the portfolios to be driven by a specific change in the macro environment. Late in the period, there were signs of stress in the multi-year outperformance trend of growth and defensive yield, with some rotation to value. Time will tell if this persists; if so, it will present a different environment to the one which has prevailed for much of the last five years.

Regardless, we will position the portfolios to be driven by company-level insight. This strategy, backed by our large team, has proven itself over time. It is grounded in the experience of Crispin Murray, who this year ticked over 25 years with the group, the last 16 at the helm of the Australian Equity boutique. Stability has been a hallmark of the team and this year has been no exception, with no turnover among the portfolio managers and research analysts.