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Morningstar Rates BT Small Caps, Fidelity, Greencape, Schroders Share Strategies Gold

Morningstar today released its Sector Wrap-Up Report for Australian large- and small-cap share funds, covering 115 individual investment strategies and A$100.0 million in assets.

Key Findings

  • Funds that achieve Morningstar Analyst Ratings™ of Gold, Silver, or Bronze are designated Morningstar Medallists. We allocated five Australian share strategies the highest-possible Analyst Rating of Gold – BT Smaller Companies, Fidelity Australian Equities, Greencape Wholesale Broadcap, Greencape Wholesale High Conviction, and Schroder Australian Equity. We designated 21 strategies Silver, and a further 44 Bronze.
  • We upgraded BT Focus Australian Share from Bronze to Silver, because of the robust portfolio construction methodology and reasonable risk/reward profile; CFS Wholesale Small Companies – Core from Bronze to Silver, because of increased conviction in Dawn Kanelleas’ management and the investment process; and we moved Perpetual Wholesale Share-Plus Long/Short from Bronze to Silver, because of confidence in Anthony Aboud’s skills at identifying short-selling opportunities and in the likelihood of future success. We downgraded 11 strategies, due primarily to lower conviction in the investment team or process.
  • We initiated coverage of Sanlam Managed Risk Australian Share (Bronze), which has solid processes with lower-than-market volatility and drawdowns; VanEck Vectors Australian Equal Weighted ETF (Bronze), a unique and attractive option with appealing risk/reward characteristics; Fidelity Future Leaders (Bronze), which possesses a strong alignment between the knowledgeable team, disciplined investment process, and strategically structured portfolio; WAM Capital Ordinary (Neutral), a capable but pricey mid-/small-cap offering; and WAM Research Limited Ordinary (Neutral), a solid, fundamental but potentially expensive option.
  • We ceased coverage of 12 strategies because they no longer met our criteria for coverage. Our views about the merits of investment strategies move over time based on manager-specific factors including investment team composition, changes to the investment process, and our degree of relative conviction.
  • A tsunami of listed investment companies (LICs) has hit the Australian sharemarket over the past four years, raising more than A$3.0 billion. Once the preserve of conservative and low-cost managers, the new breed of LICs are being marketed as simple and transparent. However, in reality there are many complexities and risks, including high costs at the initial public offer stage, high ongoing management/performance fees, and periods when the share price may trade at a discount to net tangible assets (NTA). Investors and advisers need to investigate and understand these characteristics and risks carefully before making an investment decision.
  • One issue when considering whether to select an Australian share strategy is whether to go for a concentrated or diversified approach. Our analysis indicates concentrated and diversified funds on average offer very similar risk-adjusted return characteristics. Concentrated strategies have however provided higher returns over the long run, but have also endured higher drawdowns and volatility, which may make the path to success more difficult to tolerate for many investors.
  • Assessing the performance of an investment strategy is most insightful over lengthier time periods incorporating multiple stages of the investment cycle. We examined the performance of large-cap Australian share strategies over a 10-year period to assess which outperformed consistently. Just five investment houses featured among the 10 consistently best-performing share strategies: Fidelity, Hyperion, Investors Mutual, Perpetual, and Platypus. The common characteristic among the 10 best performers was investment process stability. Fund managers which can stand the market running against them and maintain the same investment philosophy and process year after year prevail, ultimately providing a solid competitive advantage. Also of interest was the number of value strategies – despite the market view that the past few years have been a growth manager’s paradise, it would appear that many value managers can still find ‘value’ over the longer term, notwithstanding economic and market conditions.

Morningstar’s independent investment research is subscriber-paid rather than issuer-funded. We evaluate managed funds, exchange-traded funds, and listed investment companies at the same time to enable investors and advisers to make the most effective investment decision irrespective of investment structure or active or passive approach.