Quantitative & qualitative fund analysis: how to make better investment decisions? Investment Summit 2014 Brussels, 26 th of February 2014 Niels Faassen Fund Analyst Morningstar Benelux 2013 Morningstar, Inc. Alle rechten voorbehouden.
A lot of choices... 2
But...? How to determine which investment fund to select and which fund not or even for which fund it would be best to sell? 3
How to select the best fund manager? There is a Chinese saying: give a man a fish and you feed him for a day, teach a man to fish and you feed him for a lifetime That is: today we would like to provide you the tools on how to catch a fish! 4
What makes fund selection so important? A lot of investment funds don t have a Raison d'être 5
Who We Are Morningstar Global Operations Chicago Toronto Mexico City Santiago Sao Paulo Amsterdam Copenhagen Frankfurt London Luxembourg Madrid Milan Munich Oslo Paris Stockholm Zurich Cape Town Dubai Mumbai Bangkok Hong Kong Seoul Shenzhen Singapore Taipei Tokyo Auckland Sydney We re a leading provider of independent investment research We serve clients globally through our presence in North America, South America, Europe, Asia, Australia, and the Middle East Our 3,500 employees work in offices worldwide, offering local market expertise Since 1984, we ve been recognized for pioneering contributions to the investment industry Our global database includes approximately 416,000 investments 6
Who We Serve Worldwide Our mission is to create great products that help investors reach their financial goals. We help individual investors, and the institutions and advisors that serve them. Institutions 5,100 institutional clients 7,400+ Morningstar Direct SM licenses $144.8 billion in assets under advisement and management 24.6 million retirement plan participants with access to our retirement advice services through 202,000 plan sponsors and 25 plan providers Individuals 8.9 million individual investors 124,000 paid Premium Members of Morningstar.com One of the largest independent sources for equity and credit research Advisors 260,000 financial advisors About 25% of financial advisors worldwide have access to Morningstar s solutions $4.7 billion in assets under management in Morningstar Managed Portfolios SM 163,000 U.S. Morningstar Advisor Workstation SM and Morningstar Office SM licenses 7
Investment management = a people s business The cheaper a fund The longer a manager manages it The more (s)he invests in it The better it is for investors 8
It s about transparancy! In order to assess the people managing a fund, investors at least need to know who these people are... Letter sent to all Dutch Asset Managers and published in Het Financieele Dagblad, 10 January 2013 9
6 months down the road... 1 Who is the fund manager? 2 Team composition? 3 Background/experience fund manager? 4 Start date fund manager? 5 Other responsibilities fund manager? 6 Responsbilities within fund? 7 Decision structure within fund? 8 Does fund manager invest in own fund? Based on the website, latest factsheet and Annual Report 10
Everyone knows our stars and Awards......but these are essentially based on past performance... 11
Morningstar Rating: for thousands of funds 3, 5, 10 yrs and Overall Morningstar Rating based on risk adjusted (net) returns within a relevant peer group (Morningstar category) Provides a good indication of how a fund has performed relatively versus its peers The first and foremost used rating for investment funds! 12
The difference between: Morningstar Rating TM Backward looking, Objective Morningstar Analyst Rating TM Forward looking, Subjective. 13
Looking forward 14
Five Pillars - People Manager experience Has (s)he seen a full market cycle? Viewed holistically Relevance analyzed Team support tailored to strategy and portfolio? Incentive structure 15
Five Pillars - Process & Portfolio Sensible strategy that reflects investment philosophy? Consistent approach Risks Large position sizes Sector/Geographic concentration Valuation, credit quality & duration Active Share 16
Five Pillars - Parent Based on interaction with fund companies Transparency Regulatory history Stewardship or salesmanship Cultural analysis Retention of talent Compensation structure at fund company level Expenses at fund company level 17
Five Pillars - Performance Evaluation of performance within investment approach Risk-Return (long term emphasis) Behavior indifferent market circumstances Separating skill from luck Investor return 18
Five Pillars - Price Expenses: the most reliable predictor of long-term performance Composition of Total Expense Ratio (TER) Hidden costs Brokerage commissions Market impact costs Within the uncertainty, control what you can 19
So based on a thorough analysis regarding People Process & Portfolio Performance Parent Price don t let your judgement solely depend on basis of our star rating 20
Two examples of EM equity funds Allianz Global Emerging Markets Equity Fund First State Global Emerging Markets Fund 21
Allianz Global Emerging Markets Equity Fund Allianz Global Emerging Markets Equity Fund People The fund s track record has been below average As of October 2010 deputy manager Dilek Capanoglu took over from Michael Konstantinov, who managed the fund since 1997. Although she has a lot of experience (17 yrs), there is no public track record Under her management four new people have been appointed, especially for Lat-Am and bottom up stock selection The EM team exists of 9 people and additional support comes from sector specialists within Allianz It is our opinion that the right steps have been made, but we would like to see actual improvements before we can increase our conviction on the team 22
Allianz Global Emerging Markets Equity Fund Parent Since 1998 Allianz Global Investors has grown as a result of several takeovers. A # of boutiques operate rather independently; the firm is planning to combine these independent units in Europe Their fund offering has been rationalised over the last few years, though a number of trendy funds have been launched In general, fees are pretty average with a few negative expections Variable compensations are reasonably investor friendly (2/3 is focused on 3 yrperformance) The fund house is reasonably transparant in its communication with investors Process The investment process has changed quite a few times Currently it s a combination of top-down allocation and bottom-up selection Country bets used to be an active call, nowadays it s the result of the bottom-up selection Stocks are selected based on market position, profit margins, financial stability and the quality of management Valuation models and technical analyses are furthermore used for idea generation The investment horizon has been extended from 18-24 months to 3-5 years We would like to see more results before we can increase our conviction on the process 23
Allianz Global Emerging Markets Equity Fund Process (portfolio) Under the new process the portfolio has become more concentrated, although it remains sufficiently diversified The new manager is focused on searching for companies that are not too dependent on developed markets Differences in country and sector weights versus the benchmark are a result of bottom-up stock selection Technology, Energy and Consumer Staples take on a relativley large position As of 31-10-2013 Samsung, TSMC and ICBC are the largest holdings Performance Over different time periods the fund laggs the benchmark and its peers substantially Dilek Capanoglu has been at the helm of this fund since October 2010 but has been involved with the fund since 2007 A part of the lagging performance can be explained by the fund s high cost 24
Allianz Global Emerging Markets Equity Fund Price With a Total Expense Ratio (TER) of 2.25% the fund s cost level is above average when compared to the category mean of the Morningstar category (2.01%) Conclusion We are still not convinced about the merits of Allianz Global Emerging Markets Equity Fund Although Dilek Capanoglu is an experienced manager, she has a modest public track record. We have a positive view on the implemented changes, though we would like to more proof There have been numerous changes in the investment process, we would like to see more stability! So far we have not seen any substantial improvements in performance, which is in part the result of the fund s high cost level The fund maintains its Negative rating 25
First State Global Emerging Markets Fund First State Global Emerging Markets Fund People First State has one of the most experienced teams in the emerging market landscape Jonathan Asante has been one of the portfolio managers since he joined First State in 2004; since 2008 he has assumed responsibility of First State Global Emerging Markets Leaders The extensive and experienced team of over 20 people is spread out over Edinburgh, HK and Singapore; the turnover within the team is considered low Variable compensation is strongly linked with long term performance which improves the alignment between the managers and investors 26
First State Global Emerging Markets Fund Parent First State Investments is a specialised asset manager of Colonial First State Global Asset Mgt, the fund house branche of the Commonwealth Bank of Australia They are specialised in a limited number of investment strategies, given the closure of its UK equity business in 2006 We are positive on these changes, because of the focus and specialisation (in this case EM, Asia Pacific, global resources, infrastructure and real estate) Variable compensation is strongly linked with long term performance which improves the alignment between the managers and investors Process The process is bottom-up driven and managers focus on absolute returns in stead of relative returns The team applies a robust buy-and-hold process, where they focus on the quality of companies, sustainable and stable growth and valuation Partly as a result of a quant filter the universe (of over 11,000 stocks) is reduced to a watchlist of 350 names, resulting in a portfolio containing roughly 100 stocks Quality of management, corporate governance, profitability and valuation are the most important factors The turnover within the portfolio is low 27
First State Global Emerging Markets Fund Process (portfolio) The process is bottom-up driven and is relatively benchmark agnostic The benchmark deviations can be substantial and so can be the fund s performance Companies with a volatile profitability won t be admitted to the portfolio quite easily; Energy, Basic Materials and Industrials take on a relatively low weight In cyclical markets, such as in 2009, this was cleary not beneficial to the fund Consumer Discretionary is strongly represented in the portfolio Performance The fund has shown a consistent outperformance in the long term, both versus the benchmark and the Morningstar category 28
First State Global Emerging Markets Fund Price With a total Total Expense Ratio (TER) of 1.58% this fund is cheaper than the Morningstar Category median (2.01%) Conclusion We think of First State Global Emerging Markets as one of the best investor choices within the Emerging Markets landscape The management team is one of the most experienced and stable teams out there The investment process has been applied consistently and has lived up fully to its long term potential The performance is above average and its costs are relatively low All in all enough reason to maintain our Gold rating 29
Conclusions There are definately good funds and managers out there! In order to identify them it s essential to do your homework It s too simplistic to solely rely on the name of the fund house: a lot of fund houses offer both bad and good investment funds; focus and specialisation can be a first criterium Try to find experienced fund managers, with a distinctive edge Try to understand the investment process, the way it is structured and whether it is consistent with the fund s portfolio? How consistent has the fund performed? And last but not least: what price ar you willing to pay for an actively managed fund? Morningstar, being a independent (no pay for rating, but investor centric model) fund researcher can be a good starting point for your search 30
Through www.morningstar.be a lot of information can be found 31
32