The Morningstar approach

Morningstar is a global provider of investment research and investment data services.

Morningstar has extensive experience providing fund manager research and model portfolio construction to financial advice businesses in Australia and New Zealand.

Investment philosophy

The Morningstar portfolios are comprised of fund managers that Morningstar believes have a clear competitive advantage and are cost effective.

Morningstar provides research and recommendations to Consilium for the construction of the five Morningstar portfolios offered through Synergy.

Morningstar assesses investment managers based on how it believes they will perform in the future against both peers and accepted benchmarks. Morningstar’s model rewards managers that are open and transparent, have a well-run investment process, and importantly, are good fiduciaries. Morningstar has identified five key areas that it believes are crucial to predicting the future success of funds - people, process, parent, performance and price.

  • People. Morningstar judges the relevant personnel based upon key areas - experience and ability, fit and structure, workload, communication/information flow, temperament, alignment of interests, key person risk and team suitability.

  • Process. Morningstar seeks to understand the investment philosophy underpinning each fund, the key ‘edge’ of the process as executed by the manager, which elements are systematic and repeatable, the fit of the process with the resources backing the strategy and size of asset base, and whether the process has been consistently applied.

  • Parent. The fund manager and its management set the tone for key elements of Morningstar’s evaluation. These elements include capacity management, risk management, recruitment and retention of talent, and firm wide policies such as incentive pay, that drive or impede the alignment of the firms’ interests with those of fund investors.

  • Performance. When considering past performance, Morningstar focuses on long term return and risk patterns. Morningstar believes there should be clear expectations for performance in different market environments, taking into account a strategy’s process and portfolio, and then checking these expectations against actual performance in differing market environments.

  • Price. Morningstar believes expenses are one of the better predictors of future outperformance, even when evaluating net-of-fee returns, so costs form an important part of its analysis.

Morningstar reviews funds utilising the five principles and then applies a quantitative methodology to calculate a score for each fund. This score will then determine the fund’s Morningstar Analyst Rating – either gold, silver, bronze, neutral or negative.

Morningstar believes in a long term approach to portfolio construction and utilises a strategic asset allocation approach based on long term assumptions. The Morningstar portfolios are constructed utilising the highest quality managed funds identified through the process outlined above, with funds that generally carry a bronze or better rating.

Portfolio monitoring

Morningstar conducts an annual review of every fund manager in its investment universe and a comprehensive set of screens is used in the quarterly performance monitoring of investments.

Annually, Morningstar performs a comprehensive review of all funds in the Morningstar portfolios and will assess where they sit within their fund ratings criteria. Morningstar will complete the review of the fund based on the five principles outlined above.

Quarterly, the portfolio manager for the Morningstar portfolios will review the performance of the portfolios and of the underlying funds, using Morningstar’s extensive suite of analytical tools. Morningstar will look at how the portfolios have performed against their respective benchmarks and peer group averages. If this process identifies any potential issues, a more detailed analysis is undertaken.