Morningstar’s 2017 Global Equity Sector Wrap explores the debate around active versus passive, investment styles and key person risk

Sydney - 6 July 2017

Morningstar today released its Sector Wrap-Up for global equity, Asian and emerging market funds. This covered 94 strategies across unlisted and exchange traded funds.

Funds that achieve Morningstar Analyst Ratings™ of Gold, Silver, or Bronze are designated Morningstar Medalists. We allocated seven global equity strategies the highest-possible Analyst Rating of Gold, 27 were designated Silver and 34 Bronze.

We added six new funds to coverage: Capital New Perspectives (Gold); Antipodes Global – Long Only I (Silver); Antipodes Global P (Long/Short) (Bronze); Steward Investors W Worldwide Sustainability (Silver); CFS Asian Growth (Silver); Orbis Global Equity (Silver).

We upgraded to Gold from Bronze: Vanguard US Total Market Shares ETF; iShares Core S&P 500 (AU); iShares S&P 500 UAD Hedged; To Silver from Bronze: BT Asian Share; Vanguard International Share Index; Vanguard MSCI Index International ETF; BlackRock Indexed International Equity Fund; Vanguard MSCI Index International (Hdg) ETF. To Bronze from Neutral: Acadian Global Managed Volatility Equity; Acadian Wholesale Global Equity Long Short; Dimensional Emerging Markets Trust; Market Vectors MSCI World ex Australia Quality ETF; iShares MSCI Japan (AU).

We downgraded CFS Wholesale Global Resources from Silver to Neutral. To Neutral from Bronze: iShares MSCI Emerging Markets (AU) and downgraded Hunter Hall Global Value Ord; from Neutral to Negative.

Key person risk and staff turnover was a key factor in our two active fund downgrades.

In the case of Hunter Hall we already had the strategy on Neutral due to a steady exodus of investment staff from 2011 to 2013. We downgraded to Negative following the resignation of CIO and CEO Peter Hall, and the ownership and management uncertainties that this created.

The issue of key person risk is explored in more detail in the sector wrap. A number of high-profile equity funds have lost key staff. We look at examples including Platinum, Threadneedle, Stewart Investors, Magellan, Antipodes and PM Capital and explore why in some cases we kept the faith, but in other cases staff turnover has resulted in ratings downgrades. Key person risk is a threat that investors should be aware of, and to this end, the introduction of Manager Research’s Analyst Note feature provides timely updates to investors in the event of a material change.

In 2016 Morningstar stated that value could be due for a rebound any time after years of struggles, but we didn't expect to be proved correct so quickly. Value stocks outperformed so strongly in 2016 that we now caution investors in the other direction. Don’t throw out growth funds due to recent underperformance, but be aware of the styles across your portfolio and consider having some diversification of investment styles.

The active versus passive debate continues to rage and our sector wrap explores whether volatility at a market and stock level could be a potential reason for the relative success of passive strategies. A look at the data suggests that active managers have a harder time of adding value after their higher costs, when returns are undispersed, as has been the case since the 2008 financial crisis. But it’s hazardous to make predictions using a rearview mirror, because volatility could return at any time. Index funds remain competitive, but superior active managers will prove their worth across varying market cycles. This is yet another reminder that while big picture issues such as the active/passive debate are important, understanding the nuances of individual investments is crucial.

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.

Read the full report here.

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