quantitative & qualitative fund analysis: how to make better investment...
TRANSCRIPT
ß
‹#›
Quantitative & qualitative fund analysis: how to make better
investment decisions?
Investment Summit 2014
Brussels, 26th
of February 2014
© 2013 Morningstar, Inc. Alle rechten voorbehouden.
Niels Faassen
Fund Analyst Morningstar Benelux
ß
‹#›
A lot of choices...
2
ß
‹#›
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
ß
‹#›
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
ß
‹#›
What makes fund selection so important?
A lot of investment funds don’t have a Raison d'être
5
ß
‹#›
Who We Are
× 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
Chicago
Toronto
Amsterdam
Copenhagen
Frankfurt
London
Luxembourg
Madrid
Milan
Munich
Oslo
Paris
Stockholm
Zurich
Bangkok
Hong Kong
Seoul
Shenzhen
Singapore
Taipei
Tokyo
Auckland
Sydney
Cape Town
Dubai
Mumbai
Morningstar
Global Operations
Mexico City
Santiago
Sao Paulo
6
ß
‹#›
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.
Advisors Individuals Institutions
5,100 institutional clients
7,400+ Morningstar DirectSM
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
8.9 million individual investors
124,000 paid Premium Members of
Morningstar.com®
One of the largest independent
sources for equity and credit
research
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 PortfoliosSM
163,000 U.S. Morningstar®
Advisor
WorkstationSM
and Morningstar
OfficeSM
licenses
7
ß
‹#›
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
ß
‹#›
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
ß
‹#›
6 months down the road...
Based on the website, latest factsheet and Annual Report
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?
10
ß
‹#›
Everyone knows our ‘stars’ and Awards...
...but these are essentially based on past performance...
11
ß
‹#›
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
ß
‹#›
The difference between:
×Morningstar Rating TM
×Backward looking, Objective
×Morningstar Analyst Rating TM
×Forward looking, Subjective.
13
ß
‹#›
Looking forward
14
ß
‹#›
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
ß
‹#›
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
ß
‹#›
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
ß
‹#›
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
ß
‹#›
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
ß
‹#›
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
ß
‹#›
Two examples of EM equity funds
First State Global Emerging Markets Fund Allianz Global Emerging Markets Equity Fund
21
ß
‹#›
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
ß
‹#›
× 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 yr-
performance)
× 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
Allianz Global Emerging Markets Equity Fund
23
ß
‹#›
× 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
Allianz Global Emerging Markets Equity Fund
24
ß
‹#›
× 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
Allianz Global Emerging Markets Equity Fund
25
ß
‹#›
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
ß
‹#›
× 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
First State Global Emerging Markets Fund
27
ß
‹#›
× 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
First State Global Emerging Markets Fund
28
ß
‹#›
× 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
First State Global Emerging Markets Fund
29
ß
‹#›
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
ß
‹#›
32