Quantitative & qualitative fund analysis: how to make better investment …acties.trends.knack.be/acties/trends/seminars/2014/FundSummit/file… · of investment strategies, given

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


×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


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


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


25

ß

‹#›

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


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


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


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

‹#›

Through www.morningstar.be a lot of information

can be found

31

http://www.morningstar.be/

ß

‹#›

32

Documents

Quantitative & qualitative fund analysis: how to make better investment …acties.trends.knack.be/acties/trends/seminars/2014/FundSummit/file… · of investment strategies, given