Sadly, the title of our Symposium now seems all too prophetic.

Following the advice of the Australian government and health authorities, we’ve decided that the best option is to cancel the event.

Over 900 people were already registered to attend, but we all need to help ‘flatten the curve’ and prevent the spread as much as we can.

At this stage we’re not planning to re-schedule, but we’re working to make the content available to everyone who registered. We’ll provide further information on how to access these materials as it becomes available.

Who knows, we may all have plenty of time at home to watch and read!

We’d like to thank our event sponsors, AllianceBernstein, Fidante, Fidelity, Investors Mutual, Legg Mason, Pendal Group, Schroders and Talaria, and we look forward to continuing to work with them to keep you informed.

Feel free to put the Lonsec Symposium 2021 (Thursday 29th April 2021) in your diaries, and we look forward to seeing you all there, if not before.

Although the secrets of a long life remain a mystery, there are now over 300,000 centenarians across the globe and the numbers are rising. Most of us will not survive to 100 no matter how many green vegetables we eat, but there is no doubt life expectancy is increasing. In Japan, 2.5 times more adult than baby diapers are sold. Australian life expectancy from birth is among the highest in the world with the average man living to 80.7 and 84.9 for a woman. It assumes no improvement in healthcare which can increase life expectancy further.

Lonsec has partnered with AMP to make its Retirement Managed Portfolios available via MyNorth Managed Portfolio.

The portfolios harness the depth and breadth of Australia’s leading research provider, allowing users to build high-quality retirement solutions incorporating Lonsec’s best investment ideas. Underpinning the portfolios is Lonsec’s strict quality criteria, requiring funds to be rated ‘Recommended’ or higher by its investment research team.

“Our managed portfolios give financial advisers access to investment solutions supported by one of Australia’s largest investment research and consulting teams,” said Lonsec CEO Charlie Haynes.

“Being able to draw on our investment selection and portfolio construction expertise is a real plus, and we’re proud to be able to extend this access via the North platform users.”

Lonsec’s Retirement Managed Portfolios are objectives-based and focused on delivering an attractive and sustainable level of income while generating capital growth through a diversified portfolio of managed investments.

Lonsec offers three Retirement portfolios: Conservative, Balanced and Growth. Each are designed to achieve different risk and investment objectives over various timeframes. They are constructed using a range of funds that play a specific role, such as income generation, capital growth and risk control, and backed by Lonsec’s rigorous governance and review processes.

“Our Retirement Managed Portfolios have been constructed to manage the risks most relevant to investors in the retirement phase,” said Lonsec’s Chief Investment Officer Lukasz de Pourbaix.

“By diversifying across asset classes, managers and return sources, we aim to manage risks such as capital drawdown, which can materially impact the longevity of a retirement portfolio, particularly in the early stages of transitioning from superannuation to the pension phase of investing.”

“We’re very excited to be working with AMP to make these portfolios available to AMP’s North wrap users.”

Inclusion on North further expands the distribution of Lonsec’s Managed Account offering, following its existing availability on the BT, Macquarie, HUB24, Netwealth and Praemium platforms.

Lonsec’s retirement portfolios have been constructed to meet the income and capital objectives of investors in the retirement phase as well as to manage risks that are specifically relevant to retirees.

AMP’s North platform offers advisers flexible and efficient access to a range of investment products, which now include Lonsec’s retirement portfolios, giving advisers the tools they need to meet their clients’ goals.

For consumers, 2019 was a year best forgotten as negative economic news created an almost perpetual drag on sentiment and global uncertainty resulted in repeated bouts of volatility. But for investors, including Australia’s 15 million super fund members, it was a year that saw a sizeable accumulation of wealth, driven by share market gains as well as some savvy investment decisions by the top-ranking funds.

Even with the high expectations set during a year that saw share markets rally ever higher, several super funds were able to translate this favourable environment into exceptional gains for members.

Topping the leader board in 2019 was UniSuper, whose balanced option delivered a return of 18.4% over the year and is among the top performers over 10 years with a return of 8.9% per annum. Over one year, UniSuper was followed by AustralianSuper – Australia’s largest fund – which returned 17.0% in 2019 and 9.0% over 10 years. However, it’s Hostplus that remains in first place over 10 years with an annual return of 9.2%.

Top 10 balanced options (return over 1 year)


*Interim return
Source: SuperRatings

Top 25 balanced options (return over 10 years)


*Interim return
Source: SuperRatings

UniSuper came out on top in a crowded field, in which the top 10 funds delivered an average return of 16.3%. It was a tight race over longer time periods, and while markets have certainly provided a tailwind, there’s no doubt that skilful management plays a role in squeezing out additional returns.

While returns may appear narrowly spread at the top, this hides some significant differences in asset allocation and investment strategies pursued by different funds. What was interesting to see was the diversity of approaches that funds take, even at the top of the leader board. While most funds have benefited from strong equity markets, the nuances among the top performers are where there has been strong value added for members.

In the case of UniSuper, the fund continues to pursue an active management strategy with exposures predominantly to Australian and International Equities, as well as significant cash and fixed interest exposures. Allocations to illiquid assets such as infrastructure and private equity are not a key component of their strategy.

Meanwhile, Hostplus has significant allocations to illiquid assets, with these being a key driver of its performance outcomes for Property, Infrastructure and Private Equity assets. AustralianSuper has also benefited from material unlisted asset exposures, as well as fee savings generated from its in-house investment structure.

Top pension funds

One of the key challenges super funds face is the current low-yield environment, which is making it harder for funds to generate income for members. This challenge is likely to be felt more acutely by those in the post-retirement phase, who rely on the income generated by their pension product to fund living expenses.

In this environment, picking the right pension fund and option can be critical. The below chart shows how capital stable pension options (20–40% growth assets) stack up over 10 years, and while there is some dispersion in the results, every option in the top 25 by performance exceeded the typical CPI plus 3.0% target. AustralianSuper’s Stable option is the best performer, returning 7.6% p.a. over ten years, followed closely by TelstraSuper’s Conservative option and Hostplus’s Capital Stable option.

Top 25 capital stable pension options (return over 10 years)


Source: SuperRatings

Understanding risk is critical for consumers

Most consumers can’t define risk, but they know it when they experience it. For superannuation members, risk can mean the likelihood of running out of money in retirement, or not having enough cash to pay for holidays, car repairs, or an inheritance for their kids.

For young members starting out in the workforce, short-term market falls might not matter too much because their investment horizon is relatively long. But for members nearing retirement, the timing of market ups and downs can have a significant effect on the wealth they have available in the drawdown phase.

For a young worker with a relatively low super balance, being exposed to riskier assets is less of a problem – in fact, it can help them accumulate wealth over their working life. However, for members approaching retirement (aged 50 and over), an unexpected pullback in the market can mean the difference between living comfortably and having to cut back in order to get by.

For this reason, it’s important to consider not only the return that a fund delivers but also the level of risk it takes on to achieve that return. In this context, risk means the degree of variability in returns over time. Growth assets like shares may return more on average than traditionally defensive assets like fixed income, but the range of return outcomes in a given period is greater.

The table below shows the top 25 funds ranked according to their risk-adjusted return, which measures how much members are being rewarded for taking on the ups and downs.

Top 25 balanced options based on risk and return

Fund option name 7 year return (% p.a.) Rank
QSuper – Balanced 9.1 1
CareSuper – Balanced 9.8 2
Cbus – Growth (Cbus MySuper) 10.3 3
Hostplus – Balanced 10.5 4
BUSSQ Premium Choice – Balanced Growth 9.6 5
Sunsuper for Life – Balanced 10.0 6
Catholic Super – Balanced (MySuper) 9.4 7
HESTA – Core Pool 9.6 8
CSC PSSap – MySuper Balanced 9.0 9
MTAA Super – My AutoSuper 9.5 10
Media Super – Balanced 9.4 11
Intrust Core Super – MySuper 9.8 12
AustralianSuper – Balanced 10.5 13
Mercy Super – MySuper Balanced 10.0 14
Rest – Core Strategy 9.0 15
First State Super – Growth 9.7 16
QANTAS Super Gateway – Growth 8.3 17
TWUSUPER – Balanced 8.8 18
Energy Super – Balanced 9.3 19
Local Government Super Accum – Balanced Growth 9.0 20
AMIST Super – Balanced 8.9 21
VicSuper FutureSaver – Growth (MySuper) Option 9.8 22
Club Plus Super – MySuper 8.9 23
NGS Super – Diversified (MySuper) 8.9 24
LGIAsuper Accum – Diversified Growth* 8.9 25

Risk/return ranking determined by Sharpe Ratio
*Interim return
Source: SuperRatings

QSuper’s return of 9.1% p.a. over the past seven years is slightly below the average of 9.7% across the top 10 ranking funds, but it has the best return to risk ratio of its peers, meaning it delivered the best return given the level of risk involved. Funds such as CareSuper, Cbus and Hostplus were able to deliver higher returns, but for a slightly higher level of risk.

Real estate offers potential diversification away from traditional stocks and bonds, stable income, the possibility of capital appreciation and has historically offered inflation protection. The average Australian retiree is likely to have exposure to domestic residential real estate – through the family home, an investment property or holiday home – but these assets are likely concentrated in geography and in the residential sector. Commercial real estate can present geographic diversification to the US, Asia and Europe, and sector diversification into offices, shopping centres and industrial parks. The following article explores the investment choices for the commercial real estate asset class across the risk/return spectrum.

  • Real estate may provide investors with the potential to generate attractive long-term returns through possible asset appreciation and current income
  • Real estate also may serve as a hedge against inflation and offer diversification versus traditional stocks and bonds

Anyone who has purchased a home is a real estate investor — but there’s a big difference between taking on a mortgage and investing in office buildings, malls or industrial parks. In this blog, we explain the basics of real estate investing, the potential benefits, and the ways that individuals can add real estate exposure to their portfolio.

To find out more about this article, please contact:

Sam Sorace

Director, Wholesale Sales

Invesco Australia

Direct   +61 3 9611 3744

Mobile  +61 413 050 909

sam.sorace@invesco.com

Markets continued their upward trajectory in November. When you look at the returns across key asset classes over the last 12 months most asset classes have generated double digit returns. Growth assets such as equities and listed real assets generated over 20% for the year ending 30 November, while bonds generated high single digit to double digit returns. This has been a great outcome for investors and certainly well above Lonsec’s long-term expected returns for asset classes.

Part of what has fuelled these high returns, post markets getting the wobbles after the US yield curve inverted in August, can be attributed to markets pricing in the avoidance of a recession and the expectations of a potential recovery in growth. We have witnessed such ‘mini-cycles’ in the past, in 2013 and 2016, however what is different this time is that EPS growth is more muted and other factors which contributed to previous mini-cycles, such as the US or Chinese fiscal stimulus, are less likely to have an impact.

So what does this mean for markets? We think markets may experience a short-term upswing as the ‘mini-cycle’ plays out. We have therefore slightly adjusted our dynamic asset allocation tilts deploying some of the excess cash in our portfolios towards Australian equities. Our overall asset allocation continues to have a defensive skew with the objective of diversifying the portfolios by asset type and investment strategy. This positioning reflects our broader view that asset prices are stretched and that while some economic indicators have stabilised, we believe we are closer to the end of the cycle.

Veronica Klaus Head of Lonsec Investment Consulting spoke on a panel at the Professional Planner Researcher Forum in Sydney last week.

Veronica discussed the inconsistency and confusion around asset class definitions, which is one of the biggest issues confronting the industry. The way in which assets are defined as growth, defensive, etc. often lacks transparency and ultimately makes it harder for financial advisers to make the right recommendations for their clients.

However, as Veronica explains, the superannuation funds aren’t necessarily the ones to blame for the problem.

 

James Syme, Portfolio Manager, Pendal Global Emerging Markets Opportunities Fund

After five tough years, we think the combination of a more benign US monetary outlook and some extremely compelling valuations makes for some powerful opportunities in the emerging market (EM) domestic demand space.
We see domestic demand — the sum of household, government and business spending in an economy including imports but not exports — as the primary area of opportunity in EM, particularly after the 2018 sell-off.
We emphasise an exciting combination of supportive top-down conditions, good quality companies and attractive valuations.

India in favour
India is currently our most favoured market, despite economic growth recently falling to a six-year low.
We like a number of domestic names there including mortgage lenders. Now that the global liquidity outlook has eased, there is the prospect of the Reserve Bank of India continuing to cut rates even as Indian credit growth recovers.
India, unusually in EM, has not had a credit cycle in the last ten years, so the current pick-up in credit could be enduring.
Alongside that, India has ongoing demand for 5-10m residential units per year that need financing.

Mexico and UAE good value
Elsewhere, Mexican equities look markedly cheap relative to history, despite growth being decent, implying some excessively negative market expectations for the political environment.
We also like property stocks in the United Arab Emirates (UAE), particularly in Dubai.
Through its currency peg, the UAE effectively imports US monetary policy. Higher US rates coincided with oversupply of development properties to push real estate prices and related stocks down significantly.
As the Fed’s more accommodative stance improves financial conditions in Dubai, and helped by rising tourist numbers, the prospects for attractively valued Dubai property stocks look good.

South Korea and China
Turning to South Korea, the ongoing corporate governance revolution there is one of the main reasons for our overweight position.
China is a slightly separate story and continues to disappoint.
It has tightened monetary policy significantly in the last two years as the strength of the US dollar has put pressure on the Chinese renminbi, which has been a constraint on the People’s Bank of China’s ability to act.
Activity indicators remain soft, and we think that more stimulus through faster credit creation remains key to a recovery in China.

We’re bullish about:
• The EM domestic demand space offers an exciting combination of supportive top-down conditions, good quality companies and attractive valuations
• A more benign US monetary policy outlook

We’re bearish about:
• Potential for escalation in the US / China trade conflict
• Chinese growth continues to disappoint

Why allocate to Emerging Markets?
As cash rates head below 1%p.a. in Australia, the need for returns from growth assets to offset lower returns from income assets becomes very important for retirees. However in terms of portfolio construction, trying to improve returns without increasing risk becomes very important, due to the increased concerns of retirees around drawdowns. ‘

We believe that a discrete allocation to Emerging Market equities can assist retiree portfolios to achieve these goals because:
• Emerging markets tend to higher GDP growth than developed markets (DM) – and higher equity market returns (+2.46% pa over 20 years^)
• Despite this, emerging market countries are under-represented in most global equity portfolios
• The different growth profiles between DM and EM bring the benefits of diversification to a global equity allocation, without the need to try and time shifts between them.

Figure 1 demonstrates that a simple 50/50 split between MSCI World and MSCI Emerging Markets would have delivered a significantly higher return, at a very small increase in risk, than a purely developed market portfolio over the last fifteen years.

  • Figure 1: Risk-return profile since 1 Jan 2001

^ Calendar year performance of MSCI World and MSCI EM indices in AUD over 20 years to 31 December 2018.

Hear more about emerging markets as London-based portfolio manager Paul Wimborne of J O Hambro Capital Management presents an update in Sydney and Melbourne in November
Sydney (Nov 14)
Melbourne (Nov 12) 

DISCLAIMER
This communication has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 for the exclusive use of advisers and the information contained within is current as at 21 October 2019. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.
PFSL is the responsible entity and issuer of units in the Pendal Global Emerging Markets Opportunities Fund (Fund) ARSN: 159 605 811 (formerly BT Emerging Markets Opportunities Fund). A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1800 813 886 or visiting www.pendalgroup.com. You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund referred to in this presentation is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
This communication is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their or their clients’ objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.
The information in this communication may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this communication is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.
Where performance returns are quoted “After fees” then this assumes reinvestment of distributions and is calculated using exit prices which take into account management costs but not tax you may pay as an investor.

Many behavioural studies have shown there are several traits and biases that can impede us from making reasonable decisions about everything from what to eat to how to invest. Understanding these biases and considering whether they may be negatively impacting decisions can be beneficial when implementing long-term investment plans. These studies show, in general, people have asymmetric risk profiles and fear losses more than the expectation of gains by at least a 2:1 margin[1]. Interestingly, and perhaps not surprisingly, this ratio increases substantially as people approach retirement.

American psychologist and economist, Daniel Kahneman, who won a Nobel Prize for his work challenging the prevailing assumption of human rationality in modern economic theory has stated, ‘If you have an individual whose objective is to maximise wealth at a certain future point in time, then loss aversion is very bad because loss aversion will cause that individual to miss out on many opportunities.’

This loss avoidance trait stands in contrast to a basic investment principal, that investors need to accept higher risk (and higher potential for near-term losses) in order to achieve higher returns over the long term, particularly during market sell-offs. When faced with losses, rational decision-making can become impaired by the emotional desire to avoid more losses.

There are a wide range of cognitive biases that can impact retirement plans, some are listed below:

Confirmation bias

Confirmation bias is the natural human tendency to seek information that confirms an existing point of view or hypothesis. This can lead to overconfidence if investors keep seeing data that appears to confirm the decisions they have made. This overconfidence can result in a false sense that nothing is likely to go wrong, increasing the risk of being blindsided when something does go wrong.

Information bias

Information bias is the tendency to evaluate information even when it is useless in understanding a problem or issue. Investors are exposed to an array of information daily, and it is difficult to filter through this and focus on the relevant information. In general, investors would make superior investment decisions if they ignored daily share price movements and focused on prices compared to the medium-term prospects for the investments. By ignoring daily share price commentary, investors would overcome a dangerous source of information bias in the investment decision making process.

Loss aversion bias

Loss aversion is the tendency for people to strongly prefer avoiding losses than obtaining gains. The loss aversion effect can lead to poor and irrational investment decisions, where investors refuse to sell loss-making investments in the hope of making their money back. Investors fixated on loss aversion can miss investment opportunities by failing to properly consider the opportunity cost of their investments.

Anchoring bias

Anchoring bias is the tendency to rely too heavily on, or anchor to, a past reference or one piece of information when making an investment decision. For example, if you were asked to forecast a stock’s price in three months’ time, many would start by looking at the price today and then make certain assumptions to arrive at a future price. That’s a form of anchoring bias – starting with a price today and building a sense of value based on that anchor.

How do we try and overcome the biases when building retirement portfolios?

The objective based nature of Lonsec’s Retirement portfolios means there is a greater focus on absolute rather than relative performance. Additionally, the portfolios have been constructed to manage risks, including:

  • Market and sequencing risk
  • Inflation risk
  • Longevity risk

Some investment strategies that can assist in controlling for these risks include:

Variable beta strategies can vary equity market exposure by allocating to cash in periods where equity market opportunities are perceived to be limited due to expensive valuations, or where market downside risk is considered high.

Long / Short – Active Extension (also known as 130/30 funds) utilise a broad range of strategies including short selling and adjusting the net equity position for performance enhancement, risk management and hedging purposes.

Multi-asset real return funds invest in a wide range of asset classes, with the managers having considerable flexibility in the type and percentage of asset classes allocated to. Typically, these funds will seek to limit downside risk, while also targeting a real return i.e. a CPI + objective.

Real assets such as property and infrastructure, commodities and inflation linked bonds can assist in managing against inflation risk.

When constructing the Retirement portfolios, Lonsec takes a building block approach by assigning a role for each fund – yield generation, capital growth and risk control.

The yield component of the portfolios generate yield, or a certain level of income from investments that have differing risk return characteristics. The capital growth component is designed to generate long term capital growth, with limited focus on income, and is more suited to early retirees. The risk control component is critical for retirement portfolios and is designed to reduce some of the market risks in the yield and capital growth components. It is important to note that the risk control part of the portfolios will not eliminate these risks but aims to mitigate them. Asset allocation and diversification are also important ingredients in managing the overall volatility of the portfolios.

The Retirement portfolios can assist in managing the risks that impact retirees, however it is important to note that none of these strategies provide a guaranteed outcome. The range of products that offer certainty of income or capital protection such as annuities has increased in recent years, in recognition of Australia’s aging demographics and demand for greater certainty in retirement. Separate guidance on the use of annuities is available from Lonsec.

 

[1] Gachter, Johnson, Herrmann (2010). Individual – level loss aversion in riskless and risky choices. Columbia Business School

One of the most common investment pitfalls is to back the current winner. All too often investors pile into the best performing share, asset class or fund manager over the past year in the hope that its success will be repeated. This type of naïve momentum strategy can pay off in the short term, but investors quickly find that prior successes are not so easily replicated.

Very rarely does this kind of momentum strategy hold up in the world of managed funds, even over relatively short periods of time. For example, looking at three-year rolling returns for global growth managers, it’s clear that performance can get shuffled around a lot. Those who have outperformed over the previous three years can easily find themselves near the bottom of the pack over the next three years. Equally, those languishing near the bottom can suddenly find themselves out in front of the pack.

Following the winner can make you a loser: Global growth manager return rankings (2016 versus 2019)

Source: iRate

Obviously, if your manager research is focused on performance, you need to take a long-term view. The challenge, however, is that your analysis will inevitably be limited to those managers who have built up a sufficient track record. There’s also the classic survivorship bias problem: researchers tend to focus on the performance of those funds that have managed to remain in existence over their period of analysis. For active managers, medium- and long-term market dynamics can also have a significant impact on performance. For example, there will be periods when the market favours growth managers and periods when it favours value managers. Just because growth has outperformed value over the past decade doesn’t mean it will continue to outperform in the next. A change in market fundamentals can upend even the most thoroughly researched investment theses.

This all creates a significant conundrum for quantitative research. While qualitative research methods are sometimes criticised for being subject to arbitrary rules, in fact it’s the opposite that proves the case. Determining which quantitative metrics are relevant for which managers over which timeframe is difficult to do with a high degree of precision or confidence. Determining which are the main predictors of future performance is nigh impossible.

So how do successful researchers overcome this challenge? Clearly, quantitative measures are essential in assessing which funds are capable of delivering on their investment objectives. But they are far from the only measures that should inform your investment decisions. Qualitative factors should ideally make up the bulk of your research, but they tend to play a back-seat role because gathering the qualitative intelligence required to pick successful managers is a resource-heavy, time-consuming task. This can result in its own form of selective bias, where researchers focus on those factors that are relatively easier to measure and compare.

The limitations of quant-only research

Selecting the right manager involves looking at more than just past performance. It’s about delivering future outperformance based on an in-depth assessment of individual investment teams. This means understanding how people, strategies, and capabilities come together to position fund managers for success. When it comes to selecting for future success, qualitative research is not merely a filter or a heuristic, it’s the backbone of your entire research process.

While you might be able to get away with poor manager selection when the bull market is raging, the real test comes when the market reaches a turning point. Given the troubling signals from financial markets over the past six months, this is something many investors are starting to take very seriously. Market turning points pose a real challenge for fund managers and have a way of pushing their process and discipline to their absolute limit. In times like these, product recommendations and manager selection really count, and advisers can quickly find their own processes exposed when things go wrong.

Identifying future outperformance is an artform, not a science. Lonsec’s entire research process is built around understanding the range of qualitative factors that determine manager success and giving advisers the tools to select investment products based on individual client needs. Our analysis is based on an onsite assessment of investment teams, combined with a rigorous peer review process that safeguards the quality and integrity of our investment product ratings. Looking back over the past 10 years, our qualitative process has proven its worth. Lonsec’s Recommended and Highly Recommended managers have outperformed their respective benchmarks, even during a period where the long-running beta rally has pushed passive investment strategies ever higher, casting shade on many active managers who have struggled to offer value in this environment.

Performance of Australian equity managers rated Recommended or higher by Lonsec

Performance of global equity managers rated Recommended or higher by Lonsec

Source: iRate. Average performance is calculated based on historical monthly performance of managers currently rated.

Despite the fact that some active managers struggle to beat the market, we know that there are some that can consistently outperform. But identifying them has little to do with their past performance and much to do with having the right people, resources and processes in place to deliver on their mandate. Looking back through history, there have been funds that have been highly successful, producing people who went on to found their own funds and enjoy similar success. For new funds and products entering the market, there’s often no track record to speak of, meaning qualitative factors are the only means to measure the likelihood of success. If you screen these products out simply because you don’t have enough performance data, you risk missing out on new innovations and strategies that could prove highly valuable.

People and resources

Arguably the most important factor to consider when assessing a fund is the people responsible for making the investment decisions. Your research should take into account the size of the team, its quality, its stability, and its key person risk. Is the team large enough to carry out its mission? Does its analysts have the right level of experience and a track record of success working together? Is the fund overly reliant on a single person whose departure could adversely affect the fund’s performance?

Your research should also examine the culture and structure of the fund. Does the investment team demonstrate a real passion for investing? Do they treat it as a business or a profession? Do they have a stake in the fund’s long-term performance?

Investment philosophy

One of the most telling tests of a fund manager’s capability is to ask them to explain their investment philosophy as simply and concisely as they can. A fund’s investment philosophy should not be a string empty words displayed on the manager’s website and then largely forgotten. An effective philosophy is regularly consulted to ensure that all investment decisions ae consistent with the fund’s purpose. Your research should examine the fund’s philosophy to see if it is consistent and lived out through its investment decisions.

Is the manager sticking closely to its mandate or is it stretching it too far? Is it remaining true to label and delivering on investors’ expectations, or could it end up surprising investors when the market turns? Does the manager exercise patience and buy/sell discipline, or are they liable to panic? While this is fundamentally a qualitative research exercise, this is one example where quantitative research can play a crucial supporting role. For example, Lonsec considers key valuation metrics, performance across differing market conditions, and output from style research tools using holdings-based style analysis software.

Research process

Once the soundness of the investment philosophy has been established, the next step is to ensure that the fund has a robust process in place to identify securities and incorporate them in their portfolio. This involves everything from the idea generation process to the intellectual property and software used to value assets. If the size of the manager’s investable universe is very large, what process do they have for narrowing down their list of potential opportunities? What attributes are they looking for when searching for the right stocks, bonds or properties?

What macro or market themes are they looking to take advantage of? How do they carry out their fundamental analysis and what valuation methods do they use? Do their people and systems have the appropriate breadth and depth to carry out their research process? Lonsec typically requests that managers explain multiple investment theses as a means of demonstrating the investment process at work and gauging consistency with the fund manager’s stated investment style and objectives.

Partnering with a research house to achieve in-depth qualitative research at scale

Developing an effective qualitative research model requires a lot of work, but the real challenge is in supporting the process with the right people and resources. Most investors don’t have the data or the capabilities to be carrying out in-depth qualitative research at scale, which is why they partner with a research house like Lonsec. For investors committed to generating long-term outperformance, a world class research effort is required to be able to identify and evaluate those managers that can generate consistent outperformance from the thousands of managers out there.

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.