They will be responsible for undertaking research on Australian and New Zealand managed funds, listed investment companies, and exchange-traded funds. Both report to Tom Whitelaw, Director of Manager Research Ratings.

“We’re very pleased to have Daniel and Matthew on board,” Whitelaw said. “Their appointments signal our continuing commitment to resourcing our team to provide our clients with insightful, timely manager research.”

Daniel Cheang worked most recently as Investment Manager, Manager Selection at the British Telecom Pension Scheme in London for three years, where he was responsible for long-only and fund-of-fund manager selection, portfolio construction, and maximising the benefits of manager relationships within the private equity and infrastructure allocations.

Before that, he was a Senior Investment Analyst at EFG Asset Management for three years, responsible for selection and monitoring of equity, fixed income, and property funds. He has also worked in assistant portfolio manager and analyst roles at Schroders, Credit Suisse, and Goldman Sachs Asset Management in the United Kingdom, and BT Financial Group.

Daniel has a Bachelor of Science degree from the University of Sydney, a Graduate Diploma of Applied Finance & Investment from Finsia, and is a CFA charterholder.

Matthew Wu worked previously in junior equity analysis roles at The Intelligent Investor and Microequities and as a property analyst at the University Network for Investing and Trading. He has a Bachelor of Science degree with honours in financial mathematics from the University of New South Wales.

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Millinium has been awarded a 5-star rating, the highest possible, for its Fixed Income Mandate.

The Morningstar award means that three of Millinium’s four portfolios have now been awarded a 5-star rating in either their wholesale or retail versions. The Australian Equities Mandate (for wholesale investors) and the MSF Multi-Strategy Income Option (for retail investors) received five-star ratings in March 2013.

The Fixed Income Mandate (for wholesale investors) is ranked first for performance in Morningstar’s institutional sector survey over one, two and three years to July 2014. It was a clear leader over three years, outperforming the next-ranked fund by an annualised 4.84 percentage points over those three years.

The performance shows Millinium’s skill across the asset classes as it comes after the Australian Equities Mandate beat all other Australian equity funds in the Morningstar survey for the year to June 2014. The equities fund returned a bumper 29.7 per cent and was also the top performing fund over three years with a 25.6 per cent total return.

Millinium chief investment officer Mark Phillips said the Fixed Income Mandate focused on providing absolute returns and was not managed against a benchmark, reflecting Millinium’s strong conviction in its investment ideas and determination to provide consistent returns to investors.

“We believe that a manager that is focused on making positive returns and has the freedom and dexterity to seek quality assets wherever they are available can outperform,” Mr Phillips said.  “I think our performance to date bears that out.”

The fixed income portfolio is positioned in a relatively small number of quality bonds, given Millinium’s belief that the US Federal Reserve’s ultra-low interest rate policy is leading to an increasing underpricing of risk and raising the threat of widespread credit defaults.

Head of equities Neill Colledge, who has 35 years of professional investment experience, said Millinium’s funds were positioned conservatively in order to minimise the downside from a likely correction in credit markets, which would also impact equities.

“Global defaults will put upward pressure on local interest rates and downward pressure on local share prices,” Mr Colledge said. “However, the higher quality of Australian credit markets may attract investors who are looking for a safe haven, which will tend to lift the Australian dollar.”

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Guy Callaghan – Business Development Manager – Morningstar

Morningstar Australasia has appointed Guy Callaghan as Melbourne-based Business Development Manager to further enhance the firm’s sales and client relationship management efforts.
 
“We’re very pleased to have Guy on board,” said Morningstar Australasia Head of Sales Nigel Crampton.

“We’re working with an increasing number of dealer groups, brokers, institutions, and other organisations to provide integrated solutions in research, software, and data. I’m confident that Guy will make a significant contribution to these efforts and to our broader mission of helping investors make better decisions.”

Guy will be responsible for the sale of Morningstar’s solutions and building and managing relationships with clients in Victoria, South Australia, Western Australia, and Tasmania.
 
Guy has worked extensively in business development, relationship management, project management, and marketing with extensive exposure to the financial services industry. His previous positions have included director of 2integrity, a business consulting to financial planning and accounting practices; strategy consulting with Foxrock Consulting and Zest Wealth Advisers; and working in business development/wealth advice with Fordham Investment Management. He has also worked in business/management consulting with SMS Management & Technology and Ultradata Australia.
 
He has bachelor’s degrees in commerce and education from the University of Canterbury, New Zealand, and a Diploma of Financial Planning.

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The aim of the report is to encourage dialogue about global best practices for managed funds from the perspective of fund investors.

Morningstar researchers evaluated and scored countries in four categories: regulation and taxation, disclosure, fees and expenses, and sales and media, based on a combination of factual research and interviews with Morningstar analysts in each country.

Each country was then graded on a scale from A to F for each of the four topics, and these grades were then combined to form an overall grade. The report is not a commentary on a country’s managed funds industry, as there are many factors besides industry behaviour that can affect an investor’s experience.

“We launched the first Global Fund Investor Experience Report in 2009 to examine the treatment of managed fund investors in 16 countries, with the goal of advancing a dialogue about best practices worldwide. Since that time, we’ve had numerous conversations with regulators and fund managers in multiple countries about their existing policies and ways to improve,” said Morningstar Australasia Chief Executive Officer Anthony Serhan.

“Working with our analysts around the world, we expanded our survey to 24 countries this year. We hope our findings will help fund managers and regulators around the globe continue to focus on improving the environment for investors.”

Australia
Australia scored a C+. Australian investors enjoy low costs and favourable sales practices from a global perspective, but disclosure practices are comparatively weak and tax costs relatively high.

Australia fares very well with respect to fees and expenses. Australian share, multi-sector, and fixed income funds are some of the least expensive globally.

Australia also fares well in the area of sales and media, benefitting from open architecture platforms and a variety of sales channels. The Future of Financial Advice (FOFA) regulations place a fiduciary standard requiring financial advisers to place investors’ interests ahead of their own. This protection is stronger than found in most of the world.

Australia is the last country in this report without any form of mandated, periodic portfolio holdings disclosure presently or in proposed regulations for managed funds. With global best practices being mandatory quarterly disclosure, Australia is very far from the mark. There have been positive steps, however, with voluntary disclosure standards well-advanced and a mandated requirement due to be introduced under the MySuper regulations.

Australia’s product disclosure statement misses some marks as a simplified prospectus. Nowhere in the disclosure is portfolio manager information available. The document also lacks standardised returns, and poorly describes investment strategy and risks.

Australian managed fund investors suffer some of the highest investment taxes of any country in the report. Australia is one of only a handful of countries in which capital gains are passed through to fund investors annually, rather than deferred, and accumulated in the gains in the fund unit price. Fund investors also pay consumption taxes on the investment management service.

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Key Findings
Funds which achieve Morningstar Analyst RatingsTM of Gold, Silver, or Bronze are designated Morningstar Medallists.

• We gave two of the eight strategies we assessed the second highest-possible Analyst Rating of Silver – Magellan Infrastructure and RARE Infrastructure Value. A further two were designated Bronze – Colonial First State Global Listed Infrastructure and Vanguard Global Infrastructure. 
• Global listed infrastructure’s inflation-fighting abilities have been touted as one of its primary attractions. There are some valid arguments for believing this view, but they are not foolproof, and empirical evidence gathered from academic research is far from overwhelming. 
• It’s important to not simply allocate to global listed infrastructure on the basis of concerns about inflation. Nonetheless, investors preoccupied by this issue are best-served by choosing a strategy with a very conservative definition of infrastructure.
• Global listed infrastructure has delivered relatively steady dividend yields at the underlying company level that also typically exceed other equities. These yields can change over time, however, and their decline from 2009 – 12 reflect the sector’s rising valuation.
• Importantly, external factors can affect the stability of the actual distribution paid to unitholders. While fund managers have acted to address these issues, investors looking to fulfill a regular income need should be aware of the potential shortcomings.

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“The growth rally that started mid-way through last year continued into the first quarter of 2013, despite more jitters emanating from Europe,” said Morningstar Senior Research Analyst Julian Robertson.

“It was a challenging period for fund managers, as the average manager in the majority of categories failed to surpass benchmarks. Large- and small-cap Australian share fund managers were the main exception. Among fixed income funds, credit and emerging market exposures did better, although returns across the fixed interest spectrum were meagre.”

Key Findings

• Value-style fund managers did best on average among the large-cap Australian share funds, although most of their growth counterparts also outperformed the index. Well over half (68 of 102) of large-cap Australian share funds managed to beat the market in the first three months of 2013.    
• Value-style options also came out on top in the Australian smaller companies category, the 9.43 percent quarterly average return easily outpacing the S&P/ASX Small Ordinaries Index’s 1.61 percent. The market’s result was hampered by the poor performance of small resources companies, which fell over the quarter. Only four of the 46 options in this category were unable to beat the index.
• The major international sharemarkets posted positive gains in the March quarter. Japan was a leading light in powering ahead 19.27 percent as measured by the Nikkei 225 Average Index, but the emerging markets lagged (down 2.03 percent). Only 26 of the 73 international share funds in this survey exceeded the benchmark and all styles underperformed on average. 
• The March quarter was another excellent one for global listed property, which gained nine percent. Australian listed property recorded a less impressive but still reasonable gain of 5.3 percent. Domestic property trust funds struggled to beat their benchmark in general. Internationally, no manager beat its yardstick and on average lagged by over two percent.  
• Returns from multi-sector growth funds were solid, posting an average return of 5.24 percent for the first quarter of 2013.

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The Survey includes both commercial for-profit and industry superannuation options. Morningstar classifies funds according to a proprietary classification system created to facilitate meaningful peer-relative comparisons.

Key findings 

• Growth superannuation funds struggled to record a positive return over the month of March. The median fund returned -0.4 percent. Individual results fell between a low of -0.9 percent and a high of 0.4 percent. Longer-term annualised results for the median growth fund were 11.8 percent over one year, 5.8 percent over three years, 3.2 percent over five years, and 6.9 percent over the 10 years to 31 March 2013.
• Growth assets provided a mixed bag of performance for multi-sector options over the month of March. Australian shares, as measured by the S&P/ASX300 Accumulation Index, fell -2.2 percent, international shares gained 0.6 percent, Australian property securities fell -2.7 percent, and global property securities gained 3.5 percent. International fixed interest returned 0.8 percent, but other defensive assets did not do particularly well –  cash returned 0.2 percent and Australian fixed interest was down -0.2 percent.
• The superfunds in the Morningstar Multisector Growth category held an average allocation to equities of 57.8 percent at the end of February, split between Australian equities (31.9 percent) and international equities (25.9 percent), while the average allocation to property was 8.0 percent.
• The average allocation to defensive assets totalled 23.1 percent (9.8 percent domestic fixed interest, 5.9 percent international fixed interest, and 7.4 percent cash). Legg Mason Growth had the highest allocation to Australian shares (49.7 percent), followed by Legg Mason Balanced (43.6 percent), and BlackRock Diversified Growth (41.9 percent). The highest allocation to international shares was recorded by Zurich Managed Growth (37.0 percent), followed by CFS Growth (34.6 percent), and Care Super Sustainable Balanced (31.6 percent).
• The best-performing Growth superfunds over the three years to 31 March 2013 were Rest Core (8.0 percent), followed by Legg Mason Balanced (7.7 percent), Invesco Diversified Growth (7.5 percent), AustralianSuper Conservative Balanced (7.2 percent), and Legg Mason Growth (7.1 percent). Over the five years to 31 March, Schroder Superannuation (6.0 percent), followed by REST Super Core (5.8 percent) and REST Super Diversified (4.4 percent) come out on top.
• Among the options in the Multisector Balanced category (40.0 – 60.0 percent growth assets), the best performers over the three years to 31 March 2013 were AustralianSuper Stable (6.8 percent), followed by REST Super Balanced (6.6 percent), and Optimum Balanced Growth (6.1 percent).

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Key Findings
We gave only one of the 18 Asian equities and emerging markets equities strategies we assessed the highest-possible Analyst Rating of Gold – Colonial First State Global Emerging Markets Select. We designated three Silver (Aberdeen Emerging Opportunities, Arrowstreet Emerging Markets, and Lazard Emerging Markets), and one Bronze. Aberdeen Asian Opportunities and Platinum Asia were designated Silver among the Asian equities funds.

Many investors expect strong performance from Asian and emerging sharemarkets, given their favourable demographics, typically healthy fiscal positions, and positive economic prospects. However, so far there has been little clear evidence of any sustained link between these macroeconomic characteristics and sharemarket performance. Sharemarkets may have already priced in future expectations for economic growth.

The relationship is stronger when examining future GDP growth expectations and sharemarket performance. The difference is the perceived impact of wealth effects. This is important in the context of examining emerging markets, given the effect of the rising middle class across the developing world.

Although a growth investment style would appear logical given the favourable dynamics and above-trend growth expectations, value-style investing remains fruitful in Asia and the emerging markets. Focusing solely on blue-sky companies has hurt some fund managers and their investors. The fund managers we’ve designated Morningstar Medallists typically focus on sustainability and corporate governance, generally eschewing the hot sectors.

Investing in Asia and the emerging markets should not necessarily be limited to equities. Emerging market debt can also provide a potentially attractive investment and portfolio diversification proposition. Many emerging market nations are migrating to investment-grade status, having developed more robust national balance sheets since the late 1990s. 

However, implementing dedicated emerging market debt exposure remains difficult for Australian investors and advisers. This is commonly achieved through a global fixed interest allocation. We expect opportunities for dedicated emerging market debt exposure to increase over time.

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The Survey includes both commercial for-profit and industry superannuation options. Morningstar classifies funds according to a proprietary classification system created to facilitate meaningful peer-relative comparisons.

Key Findings
The solid start to 2013 from Growth superannuation funds continued over the month of February. The median fund returned 2.2 percent. Individual results fell between a low of 1.2 percent and a high of 4.5 percent. Longer-term annualised results for the median fund were 14.1 percent over one year, 7.1 percent over three years, 3.0 percent over five years, and 7.1 percent over the 10 years to 28 February 2013.    

Growth assets contributed to the strong results for multi-sector options over the month of February. Australian shares, as measured by the S&P/ASX300 Accumulation Index, rose 5.3 percent, international shares gained 1.9 percent, Australian property securities 3.5 percent, and global property securities 1.7 percent. Cash returned 0.2 percent, but other defensive assets did not do particularly well – Australian fixed interest was up 0.6 percent and international fixed interest 0.8 percent. 
 
The superfunds in the Morningstar Multisector Growth category held an average allocation to equities of 58.1 percent at the end of January, split between Australian equities (31.2 percent) and international equities (26.9 percent), while the average allocation to property was 7.5 percent.

The average allocation to defensive assets totalled 23.1 percent (10.1 percent domestic fixed interest, 6.3 percent international fixed interest, and 6.7 percent cash). BlackRock Scientific Diversified Growth had the highest allocation to Australian shares (41.0 percent), followed by Maple-Brown Abbott and Equip (formerly Equipsuper) both (40.0 percent).

The highest allocation to international shares was recorded by Zurich Managed Growth (37.9 percent), followed by CFS Growth (35.0 percent), and Care Super (31.6 percent).
 
The best-performing Growth superfunds over the three years to 28 February 2013 were Legg Mason Balanced and REST Super Core both (9.2 percent), followed by Legg Mason Growth (8.9 percent), Invesco Diversified Growth (8.6 percent), and AustralianSuper Conservative (8.3 percent).

Over the five years to 28 February, Schroder Superannuation (6.1 percent), followed by REST Super Core (5.8 percent) and Perpetual Balanced Growth (4.5 percent) come out on top.  
 
Among the options in the Multisector Balanced category (40.0 ? 60.0 percent growth assets), the best performers over the three years to 28 February 2013 were AustralianSuper Stable (7.5 percent), followed by REST Super Balanced (7.3 percent), and Energy Super (7.1 percent).

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Morningstar wraps up global equities strategy reviews

Morningstar today released its Sector Wrap-Up for global equities funds, covering 50 global large-cap strategies and eight global small-cap strategies.

Morningstar does not charge or accept payment from fund managers to participate in qualitative research reviews.

Key findings
We gave two of the 50 global large-cap strategies we assessed the highest-possible Morningstar Analyst RatingTM of Gold: MFS Global Equity and Platinum International. We designated 10 offerings Silver, 16 Bronze, and one Negative (AMP Capital/AllianceBernstein Global Equity Growth). Only one global small-cap strategy achieved an Analyst Rating higher than Neutral: Dimensional Global Small Company (Bronze).

Many Australian investors maintain a home country bias in their portfolios. They can hardly be blamed: the local sharemarket and Australian dollar have strongly outpaced their global brethren for more than 10 years. Now may be a good time for investors to consider tempering these local tilts, however.

The global shares asset class provides greater exposure to stocks that will participate in the next phase of global capital growth and, as ever, the risk mitigation benefits of currency diversification cannot be ignored.

Morningstar stock research suggests that recent surges in global sharemarkets and the associated rise in stock valuations shouldn’t discourage investors and advisers from diversifying portfolios.

So-called ‘expensive defensives’ have garnered much attention over the past year. Some commentators claim that these large consumer-oriented names are overpriced, but we suggest that the criticisms lobbed at these stocks and the funds that hold them are overblown. This debate also helps remind us of some key principles for good manager selection. 

A major criticism of global equities strategies is that they offer little income. Our examination of the data indicates that this is a fair accusation. As a result, investors in retirement or otherwise depending on the income generated by their investment may have good reason to favour strategies with higher income generation potential.

Asset flows since the global financial crisis suggest that investors have little time for global small-cap investing. We think there are good reasons to look down the global market-cap for opportunities, including diversification.

However, using a flexible large-cap strategy may be the best way to do this, in part because the potential for increased volatility and high correlation with large-cap equities mean that most investors only need a small dose of global small-caps.

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