Transcript to follow.

Q: Were Lend Lease's earnings above, in line, or below your expectations?

Tony Sherlock: Their first half earnings were probably marginally below our forecast, and that was really a function of slower sales for residential and commercial developments. These transactions are still occurring, they're just taking longer to settle. So, the company previously indicated that the average lead time between enquiry and sale was 6 weeks, and in the current environment reflecting, I suppose a slightly weaker economic outlook that period is taking close to 12 weeks, and that's impacted their level of settlements and also the earnings for that Australian development division.

Q: What were the key drivers of the result?

Sherlock: The key drivers of the result was a very strong contribution from the Valemus businesses, which comprised Abigroup, Baulderstone and Conneq, and this is the first time that they have appeared in a half-year result, and they delivered a very strong contribution to the group. Margins were up for that division to just over 5%. Revenues were very strong, and the company painted a very strong outlook for that business, and that's fairly expected, and that aligns really with the level of construction activity that happening in the resources industry and going forward that division is likely to benefit from the work that's happening in the LNG space as well.

Q: Was there anything about the result that surprised you?

Sherlock: Look the result didn't contain any major surprises. I think, what I and the market were actually looking for was an update on, or a positive news release with respect to Barangaroo development. Now their first building is - construction has actually started on that, but they haven't actually as yet secured tenants in there. The company has not as yet locked down capital partners. Whilst discussions are progressing in that space, they're not at the point where they're able to make an announcement. I think I, and again the market are also looking for the prospect of the company bringing forward development of some of the other commercial and residential towers on the Barangaroo site, and I think in the current environment that's becoming, I suppose, less likely, and the delivery timeframe is probably going to be more in line with that originally proposed rather than an accelerated delivery schedule.

Q: Were Wesfarmers' earnings above, in line or below your expectations?

Peter Warnes: Wesfarmers' first half result for the six months to December 31 of A$1.2 billion, that's before non-trading items was just fractionally below our expectations, but really have to be a hard taskmaster to mark it down. All-in-all, the composition was a little different to what we're expecting, but the top line number just slightly below expectations.

Q: What were the key drivers of the results?

Warnes: Key drivers of the result were continued good performances by their retail operations in total. Their total retail operations had sales just above A$26 billion and EBIT up nearly 7%. In this environment that is a very, very good result, with margin just improving 10 basis points. If we drill down into those operations, Coles again the anchor was very, very good. Albeit the momentum has slowed and that was what the market was a little bit disappointed with, although we were very, very comfortable with it.

When you've got a company that's increasing their EBIT by 2.5 times their top line sales number, in this environment that is very, very good performance. The Coles margin continued to expand, up 24 basis points, to 4.33%, and that was despite a drag by the liquor operations, which probably cost them near enough to 10 basis points.

Q: Was there anything about the result that surprised you?

Warnes: So, overall, we were comfortable with Coles. The other surprise was Kmart. Kmart, despite the fact that the both headline and comparable sales were slightly negative the EBIT was up nearly 9% and the margin moved from 7.7% to 8.6%. Again, in a discretionary environment that's an excellent result. Target whilst was a little disappointing in terms of where it finished, for them to hold a 70 basis point move on the downside in margin in this environment we were quite satisfied. Elsewhere Bunnings continued to perform very, very strongly. EBIT up 6.1%, and only a two basis point move down in their margin to 12.77%. Again, in this environment, a very, very good report.

Industrial and Safety surprised us nicely on the upside. This I'm starting to reclassify now as almost Bunnings Wholesale. A nice move in sales up nearly 9%, but EBIT jumped nearly 23%, and margin is moving nicely north to 11.5%. They were the surprises on the upside. On the downside, Resources was disappointing, the EBIT number was flat at A$250 million. There were reasons for that, still some legacy costs from the Queensland floods, and they're having problems commissioning this new expanded operation at Curragh, but we would think that the sales volumes will improve in the second half, and that result will be better in the second half.

Insurance was down, and we all know the reasons why insurance was down. It's only a small part of their operations, and there was no surprises there, because this has been well telegraphed to the market.

Q: Were Westpac's earnings above, in line or below your expectations?

David Ellis: Westpac's first quarter 2012 trading update provided a disappointing picture for the period. Earnings were below expectation. We were looking for A$1.6 billion and they came in at A$1.5 billion.

Q: What were the key drivers of the result?

Ellis: The key drivers of the result were lower net interest margins, about 10 basis points lower over the three months; higher operating costs; lower revenue in the wealth management business; and lower revenue in the financial markets area.

Q: Was there anything about the result that surprised you?

Ellis: The fall in net interest margins didn't surprise. The increase in costs did surprise. Also, there was a little - there was a slight tick-up in bad debts, but that was from a very low base. So, that was a little bit surprising but not a major concern. At the capital, Tier 1 capital improved a little bit. I was looking for a bit more growth or increasing Tier 1 capital.

Q: Were CBA's earnings above, in line or below your expectations?

David Walker: CBA's interim result for the first time for the financial year of 2012 was in line with our expectations. We don't expect to have to upgrade or downgrade our full year forecast. The composition was of quality with fairly good performances across most divisions. There was a compositional surprise, in that bad debt surprised on the downside, while operating costs surprised on the upside. However, the increase in operating costs was due to some one-off factors, so the costs should normalize in the second half.

Q: What were the key drivers of the result?

Walker: This key drivers of the results were slow growth in credit, slow growth in lending environment, pressure on net interest margins on the retail bank from the higher wholesale and deposit funding costs, lower wealth management income in a weak and volatile equity market, high operating costs as I mentioned, lower bad debts expense as I mentioned, and a better insurance results due to favorable claims experience and premium growth.

Q: Was there anything about the result that surprised you?

Walker: The surprise was the further improvement in bad debts expense to very low levels, well below mid-cycle levels. This underlines just how good CBA is at risk management. So the loans it wrote last year and the years before have not gone bad on the bank. The bank has expertise at underwriting loans, choosing low-risk customers, low-risk risks, and bringing those on to its balance sheet, and pricing those and tracking those customers. So it's a model of how to grow a low risk bank.

Christine St. Anne: Morningstar's Tim Murphy has been busy with the upcoming Morningstar Awards 2012. We've managed to grab some time with him to discuss the reasons behind the awards and what makes a good manager. Tim, welcome.

Tim Murphy: Thanks, Christine.

St. Anne: Firstly Tim, can you give us a reason behind the awards?

Murphy: Sure. So, we have these awards on an annual basis. The idea being that we recognize fund managers that have delivered solid returns for the unit-holders and investors in their funds, not only last year but over the long term. So, it's a recognition from us of the achievements of particular fund managers within each asset class, and then of course, overall for our overall fund manager of the year as well, which represents excellence in multiple categories or asset classes across the board.

St. Anne: So, what makes a good fund manager?

Murphy: So, in determining awards there's three broad criteria that we use. They're an annual award, so clearly one of the criteria is you have to have performed well last year, and that I think goes without saying. But, I think where our awards are somewhat different to many others out there is the fact that there is much more behind that. We don't just pick the best performer last year and give them an award. Anyone can do that. But rather to make these more robust on a forward-looking basis, we look at not only last year but also how is the longer term performance of those fund managers been and certainly looking at that not only in absolute terms, but on a risk-adjusted basis. We all know that investors out there suffer much more pain from draw downs than they do from equivalent drops. So, we penalize funds with downside volatility over the long-term as well on that.

Thirdly too, is the qualitative overlay of our research team. So, I have 10 researches in my team that are analyzing these funds day-in, day-out. So, combining those who are funds that performed well last year, who are funds that have performed well over long-term on a risk-adjusted basis, and who are funds that we think are going to be good long-term investments into the future for people. So, combining those three criteria within each award category is how we narrow those down to the finalist, and of course being a winner.

St. Anne: Tim, are you picking up any trends from this year's awards?

Murphy: It's interesting. It very much varies across asset classes. Clearly last year was a fairly challenging environment for most markets and asset classes. So certainly in equities, managers that had more quality-driven processes, alternative fund, their portfolios invested in some less speculative lower beta type names have tended to do well last year. So, certainly there is a consistent element of the contenders with those sorts of characteristics in equities.

On the fixed interest side, certainly, any managers that were long duration last year, which they weren't many, was certainly a common theme that stood out, where as most managers tended to be shorter duration, i.e. had less interest rate exposure. So, as interest rates fell sharper than people were predicting at the start of the year, if you were short duration, then you didn't perform as well as the broader benchmark. So, that's where some of the index funds looked quite good in the relative context last year.

St. Anne: Tim, finally, big and small managers, did either dominate the awards this year?

Murphy: They're all in the mix, as we've said many times before. We certainly don't have any particular preference of one model versus the other. Each have their pros and each have their cons. If you're looking through the contenders this year, there's a more than adequate mix of both institutional managers and boutique managers. So, both would be well represented on the awards nights at the end of February.

St. Anne: Tim, thanks for much for your time, today.

Murphy: Thanks, Christine.

Q: Were JB Hi-Fi�s earnings above, in line or below your expectations?

Tim Montague-Jones: JB Hi-Fi's earnings were in line with our expectations. They came out with a profit downgrade back in December, and the result is in line with that downgrade, so no big surprise. Sales were up 5.5%, and this is largely due to the fact that they opened 10 stores during the period, while comparable sales actually fell, resulting in an EBIT decline of about 5%. Net profit was also down about 9.4%; this is largely because of the buyback. They actually borrowed money to buy back shares at a high interest cost means that the net profit is down, but this is in line with our expectations.

Q: What were the key drivers of the result?

Montague-Jones: The key drivers, as was reiterated to us and released back in December, is price deflation, which is occurring in electrical division in the whole industry, where flat screen TV prices continue to tumble. So, the volume of sales has increased, for flat screens in particular up 15%, but the actual prices are falling by 27%. So, your comparable sales growth is actually down 17%. So, to compare this year's result on last year's, with a lower sales while your costs continue or slightly rise, it's going to obviously contract your margin, and that's what's occurred here. The profit margin has declined. So, the reported profit is down 5% compared to last year.

Q: Was there anything about the result that surprised you?

Montague-Jones: The possible slight positive from the result is in the last 13 days comparable sales growth is up 1%, which could indicate that maybe retail conditions have stabilized. We would think it's a bit too early to tell at the moment, but it does offer some maybe glimpse of a potential that there might be a brighter future ahead.

Q: Were Leighton's earnings above, in line or below your expectations?

Ross Macmillan: Leighton's results were exactly in line. Leighton has worked very hard over the past three or four months to ensure that the market knew exactly how much it was going to report. It had been forecasting net profit after tax of A$250 million. A month ago it upgraded its operating net profit after tax to A$270 million.

Now, the company reported an underlying net profit after tax of A$272 million, so right on line there. They also reported one off capital gain on the sale of their HWE Mining business to BHP of A$167 million. Unfortunately, there were two impairments. There was an impairment on their investment in BrisConnect that was written down A$49 million, and there was also impairment on their Middle East operations and the impairment there was A$50 million. There was also, minority interest received A$5 million of the profit.

Q: What were the key drivers of the result?

Macmillan: Key drivers of the result were the good underlying performance from the 400 mining, infrastructure, construction, and service projects that the company is currently undertaking. In particular, I would single out the mining operations in Australia and also the mining operations in Indonesia as performing particularly well during the last six months.

Certainly, they have also made good progress on their two troubled infrastructure construction projects in Australia; on the Brisbane Airport Link that's now 95% complete and on the Victorian Desalination Plant, that's also 90% complete. They are both heading towards successful completion.

Q: Was there anything about the result that surprised you?

Macmillan: Two surprising things in the result. Firstly, dividend payment of A$0.60, unfranked. Now, that's a return to dividend payments after the final dividend for the FY11 year, there was no dividend payment. That was mainly due to the company reporting a large loss, so shareholders back receiving dividends.

Now, the second surprising thing in the result and somewhat troubling was the Middle East operations, the Habtoor Leighton operation, still not performing as we would expect. It's still underperforming. It's certainly been awarded a number of good contracts, but legacy receivables are the key issue there. The company is having trouble getting payment from some of the projects that it has undertaken and I think that that will consume a lot of management time over the next six months.

Q: Were Newcrest's earning above, in line or below your expectations?

Mat Hodge: Their result was better than expected. Revenue was better, sales volumes were a bit higher than we were expecting. Also, costs were a little bit lower with increase in deferred cost. So, that drove up the bottom line. There was also a once-off item with the sale of Cracow and Mt Rawdon which added A$55 million.

Q: What were the key drivers of the result?

Hodge: Gold volumes were flat, but the gold price was up quite a bit in A$. Copper volumes were up as well but slightly offset by a slightly lower price.

Q: Was there anything about the result that surprised you?

Hodge: Newcrest has decided to lift their dividend. It's still quite a small dividend on the stock. On a A$30 odd stock, it's A$0.12 interim, but that's up from A$0.10 previously, and it's positive to see them making noises about returning more cash to shareholders, particularly as the gold price rises.

Q: Were Telstra's earnings above, in line or below your expectations?

Peter Warnes: Telstra's half year earnings for the six months to December 31 were basically in line with our expectations for equity holders at $1.468 billion and a very good performance all around, albeit that the composition of the bottom line was a little bit different to what we anticipated, but overall, a solid performance, guidance met, and more importantly, full year guidance reaffirmed.

Q: What were the key drivers of the result?

Warnes: The key drivers of this result were a very, very strong performance in mobiles. This is the cornerstone now of Telstra's future growth and another 958,000 mobile customers were added in the six months, and that's off 1.6 million additions in FY11. So, this momentum is very, very strong. Importantly, 436,000 new mobile broadband customers and 338,000 new handheld mobile customers. This is the core of the mobile business and these numbers should make Stephen Conroy and Mike Quigley be very, very nervous.

This growth in mobile is accelerating. A year ago fixed mobile customers exceeded mobile broadband customers. The numbers then were 2.5 million fixed, 1.97 million mobile broadband. At December 31, the tide had turned completely and there was 2.74 million mobile broadband customers and 2.4 million fixed broadband customers. That is a very, very huge swing and I believe the momentum will continue. Fixed broadband is not what people are looking for. They are looking for connectivity and mobile connectivity and particularly in the age bracket between 20 and 39. That's what's happening in the marketplace.

Elsewhere the Network Applications and Services was a very, very strong result, up 19.4% at the revenue line and it is another very, very strong growth operation within the Telstra Group and I expect those revenues, which are running at about an annualized rate of $1.1 billion at the moment to surge through $2 billion within five years.

The PSTN revenue was down as expected by 9% as people chopped off their fixed lines and migrated to mobile, but bundling offers there did soften the reduction. This is the copper network revenue stream that Telstra will be compensated for when the NBN agreement is finally signed and they will be compensated very, very nicely.

Elsewhere, Sensis within the Digital Media operation did disappoint as it struggles to really get on top of this very, very rapid migration from print to online media, and particularly in the yellow and white pages. There are still some problems there, albeit it's a small part of the business but that was disappointing and will be a disappointing result for the full year, albeit we do expect a second half recovery.

Q: Was there anything about the result that surprised you?

Warnes: The surprises in the result were, as I said, this very, very strong move in mobile and the disappointment on Sensis. Surprises on the positive side, as I reiterate, is in mobile space and in addition to that the Network Applications and Services, they are going to be the two strong performers over the next three or four years for Telstra. We have $11 billion worth of net present value of payments coming from NBN Co and the government that will offset the fall in PSTN fixed line revenues and that is really going to underpin the free cash flow and the revenue stream for Telstra for many, many years into the future. This really does underpin the $0.28 fully franked dividend for many years and so we see that as a very, very nice situation. So, overall a very strong performance at the operational level and a sound result.

Q: Were BHP's earnings above, in line or below your expectations?

Mark Taylor: They were below our expectations, but we were at the upper end of market. They were pretty much in line with consensus, but whichever way you slice it, it was still a very, very strong result, probably their second strongest interim result on record despite some price weakness in some key commodities and some very strong headwinds on the cost front. They generated almost $US10 billion in underlying net profit, so a pretty good result really.

BHP's result is a much more balanced result than Rio's is likely to be. Their asset distribution is more balanced and diversified. Rio is heavily skewed to iron ore and I think that probably means that Rio won't suffer quite the cost impacts that BHP did. They don't have the coking coal exposure in Queensland and iron ore is just such a huge slug of Rio's earnings. So, they're going to enjoy relatively high iron ore prices and growing volumes there. So, I expect their result will be more run-of-the-mill and inline with our expectations.

Q: What were the key drivers of the result?

Taylor: The key drivers were steady-as-she-goes result from the iron ore business despite some softening in prices. Key detractors were copper, which suffered from softer prices and also some lower grades at some key mines and some industrial action, and the coking coal result was a bit softer than expected to with the remnant weather effects of weather in Queensland still impacting there. And I think you saw some of the lower volumes as a result of some one-offs, meant that unit costs rose over a fixed cost base, but nevertheless there was still some element of surprise in the amount of cost increase in some areas, that's something that we're taking onboard a bit in the future tempering some of our thought process.

Q: Was there anything about the result that surprised you?

Taylor: I guess the thing that surprised was just how strong the petroleum division result was. BHP recently purchased Petrohawk Energy, a shale gas producer in the U.S. and gas prices have been very weak in the U.S. and there was some expectation that perhaps that was going to dampen the result from the petroleum division, but to the contrary, BHP reported a very strong result there. I think they focused on the liquids-rich portion of those gas fields and that was one of the reasons that helped, but also they have favorably low operating costs as well. So, that was a positive surprise. And I guess on the downside, just quite the extent to which copper and coking coal suffered at the hands of grade and weather and other things. Those divisions were surprisingly weak. Aluminum was not unexpectedly weak. A pretty woeful result there, but well flagged.

Q: Were NAB's earnings above, in line or below your expectations?

David Ellis: NAB's earnings for the first quarter of 2012 were below my expectations and also below the market consensus numbers. I was looking around about the 1.5 billion for cash earnings and the result came in at about 1.4 billion.

Q: What were the key drivers of the result?

Ellis: I think the key drivers of the result were the sharp fall in net interest margins from about 2.28% down to 2.19%, so that surprised me. I think it surprised the market. That fall in net interest margins was primarily due to high funding costs, both from customer deposits and wholesale funding. It's not surprising that wholesale funding costs are up so high, but I was a bit surprised that customer deposits costs were higher. The second main driver of the result was high bad debts, but not in Australia, the high bad debts were primarily from NAB's U.K. operations and also the U.K. banks accounted for a fair proportion of the decrease in net interest margins. So, the U.K. banks were -- caused the main surprises of the result.

Q: Was there anything about the result that surprised you?

Ellis: Just to reiterate, the Australian operations, which of course are the largest part of National Australia Bank performed soundly, no major surprises in Australia, bad debts were under control. NAB benefited from very strong lending growth in both home loans and business loans and also strong growth in customer deposits. However, NAB's U.K. businesses are under review. NAB announced a strategic review of its operation in the United Kingdom and the outcome is expected to be released in May this year and NAB noted today that continuing on a similar business model and structure in the U.K. is not an outcome they expect. So, the U.K. businesses were a big drag on the overall group result and that was the major surprise of today's announcement.

Christine Benz: Hi, I'm Christine Benz from Morningstar.com.

Investors often behave in ways that run counter to their own interests. Carl Richards, a financial planner, a blogger for The New York Times and a contributor to MorningstarAdvisor.com, has written new book that addresses this tendency, and it's called The Behavior Gap. He is joining me via Skype to talk about it today.

Carl, you've got a great sketch in the book, and I think it comes back to this idea of what a lot of behavioral economists call "anchoring." So let's talk about what that is, and also to the extent that you can offer some concrete ideas for investors to combat that tendency to anchor on what's going on in the present period of time.

Carl Richards: The idea behind anchoring, we all do this, and it's really easy, at least recently it's been, with real estate. We tend to get focused on a price, and it's often either the price we bought an asset at. We could talk about an individual stock; let's say that you paid $50. That's the example I use this sketch. You paid $50 for XYZ stock, or you put $5,000 into a specific mutual fund, and now it's only worth $30; the stock has gone from $50 to $30.

There is this tendency for us to feel like, "if it just gets back to $50, I'll sell it. I  made a mistake," because we don't want to realize the loss. Selling it is actually the physical act that represents recognizing a loss, recognizing a mistake--I made a mistake--and so as long as we don't sell it, we can still pretend like maybe we didn't make a mistake.

So we anchor on this $50, and I hear people say this all time, "I'll just sell that when it gets back where I bought it." The thing we have to realize, and it is the same with real estate, if you're trying to sell a rental property or your own residence, and you paid $200,000 for the place and it's only worth $150,000, nobody cares that you paid $200,000. The market, and back to the stock example, nobody cares if you paid $50 and it's trading for $30. Nobody cares--the market doesn't care. The market doesn't care.

Benz: The stock doesn't know it was once $50.

Richards: The stock doesn't know, and nobody else in the market cares what you paid for it. All they care for is what's the value today. ... And I think we do this investments a lot; we think, "I inherited this from grandmother." We have these are emotional reasons, sometimes it's anchoring, sometimes it's other emotional reasons that we hold on to investments, and we end up with this sort of collection, almost like a smorgasbord; instead of a portfolio, we have this sort of collection that, "I bought that back here, and I bought this here, and I haven't sold it." Sometimes they represent skeletons in the closet.

I think one really helpful thing is what I call the overnight test, and it's just to take your portfolio--and I think it's helpful to do this once a year--I don't think you should be making these changes, but ask yourself this question: "If somebody sold everything in my portfolio today"--and again, this is totally hypothetical, don't worry about taxes, don't worry about commissions or fees, just hypothetically, if somebody sold everything in your portfolio today and you woke up tomorrow with cash, would you reinvest it the same way?

Almost universally when I ask that question, people say "no." I know that XYZ stock was a mistake or it's not appropriate for my portfolio or just because my grandmother owned it and I inherited it from her doesn't make it right for me, but there are these emotional reasons.

So once you've had that discussion, and said no I wouldn't reinvest it the same way, then you can get to work on the practical application of that information: What are the tax implications and how would you reinvest it? But I think it's helpful to at least start the conversation about, am I holding on to these things for emotional reasons that no longer make sense?

Benz: Carl, you also were forthright. You shared an example about your own experiences with real estate. Is that something that you think exemplifies this concept of anchoring?

Richards: Anchoring could have been a problem. I think the other problem at least with my own experience, we made some mistakes in our real estate decisions. We happen to live in Las Vegas. So the mistakes were amplified, because the market was so wild, and I think what you're referring to is, I wrote about it pretty publicly in the New York Times, and one of the mistakes we made, which there is a sketch earlier on in the book, is we projected the recent past and this is ... we just ... humans do this. We take the recent past, and we project into the future forever.

When real estate in Las Vegas was going up, and my income was growing and everything was great, it was very easy to say, "oh, this will continue." And we do this with the equity markets.

When things are bad, people say "It's going to bad forever; it's never going to change." We've got to remember, things change, and projecting the recent past into the future is a very, very dangerous game, and that's what happened. That's one of the classic mistakes we made.

Q: Were Woolworths' sales above, in line or below your expectations?

Peter Warnes: Woolworths' sales for the first half of their financial '12 year were basically in line with expectations. Up 5% at the headline rate and up 3.7% excluding petrol and petrol was quite elevated in this half because petrol prices over the half were up 13.5% year-on-year and that pushed that top line growth to 5%. Overall, about in line with consensus and in line with our expectations.

Q: What were the key drivers of the report?

Warnes: Key drivers of the report were still the dominant Australian food and liquor operations, albeit that they dominate the space. Their sales performance was just a tad disappointing albeit that we're in a very, very difficult retail environment and it's been very well publicized for many, many months. Elsewhere, Big W was pleasingly -- had an improvement in the second quarter over the first quarter and actually got back into positive real growth after a period of negative growth for the last couple of years. New Zealand did quite well and we're just starting to see some of the benefits trickling through from the Masters' openings. Seven Masters stores opened in the quarter and whilst it's way too early to get a trend there, those stores are tracking expectations.

Q: Was there anything that surprised you about the performance?

Warnes: In terms of positives, the liquor operations of Australian food and liquor continue to do very well. There is little doubt that Dan Murphy's in the big box space and the acquisition of Cellarmasters has enabled Woolworths to get a march on the competitor and it has made some very, very significant gains in that liquor space, so that's a positive. Other surprises were as I said, you know, Big W did surprise on the upside and I think New Zealand also did pretty well, leveraging off that euphoria from their World Rugby Cup victory. In consumer electronics, the Australian and New Zealand operations were a little better albeit still a fairly marginal performance and the decision to restructure and ultimately divest the Dick Smith consumer electronics operation didn't come as any surprise at all. I mean, we have been suggesting this should happen for at least two years or more. The space is very, very competitive. JB Hi-Fi have done a Woolworths' if you like in the space and dominate it along with Harvey Norman and Good Guys. I think the best decision has been made to withdraw from that standalone operation and they can still participate in consumer electronics by pushing it through the Big W outlets and through the multi-channels.

Q: Were Wesfarmers' sales above, in line or below your expectations?

Warnes: Wesfarmers' sales for the first half of their financial '12 year to December 31 were just a little bit below expectations I would have thought, up 5.4% in total to a bit over 25 billion and strangely enough exactly the same growth that Woolworths reported for its total sales, excluding petrol at 3.7%. Just a little bit below expectations but, gee it's very, very marginal.

Q: What were the key drivers of the report?

Warnes: Key drivers of the report continue to be the resurgence and the momentum in Coles, which is Australian food and liquor, and a very good performance continuing from the Bunnings home improvement operations. Coles continue to win the space above Woolworths' at this point in time, albeit that it's only marginal at this point in time. Deflation continues to be a problem for all retailers and that 2.1% deflation in the half is split roughly one-third due to produce and two-thirds due to the reinvestment in prices, which is attracting greater foot traffic and therefore volumes.

Bunnings was again another solid performance with 6.8% growth at the headline and 4.6% comparable for the half. That's again in an environment, particularly where their trade operations were being affected by one, weather, and two, a very subdued homebuilding activity throughout Australia. So, Bunnings still doing very well.

Further down the chain, the discretionary retailers Target and Kmart, both had slightly negative quarters and halves at both the headline and comparables, but because of deflation got back into positive territory in terms of real growth and volume growth. In the environment that's not a bad situation and I do think that there will be some improvement going forward as both of those operations have had some very, very strong inventory management, particularly seesaw inventories have been cut right back. So, they are going into January in very good shape. So, other than that it wasn't a bad performance.

Q: Was there anything that surprised you about the performance?

Warnes: Surprises were, in the liquor part of Coles disappointing where it was a positive from a Woolworths' point of view. They are certainly lagging in the big box area. First Choice is well behind the Dan Murphy offer and there are a lot of things to be answered there. We would suspect that management now is going to have a very hard look at the liquor offer. They were the recipient of a pretty ordinary IT platform in liquor and that has been remedied now and I would suspect that we will see an improvement in liquor.

Elsewhere, I suspect that Kmart might have been an little bit disappointing because, you know, it has had the wood if you like on Big W and has had continuing revival under Guy Russo and it was also slightly negative headline and comps, and I think the market was looking for a better performance there, but overall no great surprises. There is no demons out there in Wesfarmers' retail operations and a lot more customers shopping at their outlets.

Christine St Anne: Today we speak with Morningstar's Tim Murphy about the latest changes to the ETF market, and what investors can expect for 2012.

Tim, welcome.

Tim Murphy: Thanks, Christine.

St Anne: Tim, so what were the top performing ETFs?

Murphy: So, top of the pops in December for ETFs was the agricultural side of things. So as tends to be the case, when you've a bit of volatility in markets, last month you saw, I mean, the beta shares � one of the beta shares hedged agricultural ETFs at the top of the market, so that was a strong performer for December.

St Anne: With agricultural ETFs, are they more susceptible to extreme price movements?

Murphy: Well, like any commodity, they're cyclical - highly cyclical, and often speculative sort of sectors. So as I said, they're sorts of niche exposures just tend to be at either the top or bottom of any performance list on a given short-term basis.

When you get concentrated niche ideas like that, that's the very nature of them. So, whereas the more probably broader diversified types of ETFs, which should form the core of most portfolios, all - most of the time tend to be in the middle of performance tables, the more volatile concentrated niche sectors, like single commodities will tend to be top or bottom on any short term basis.

St Anne: So, Tim, what were the ETFs that didn't perform as well as expected?

Murphy: On the flipside, so other commodity ETFs, some of the precious metals, things like silver and gold instead have been - particularly gold being very popular themes, but in that environment, in the back end of 2011, really suffered from sharp outflows and weakening sentiment driving prices down there. So as tends to be the case, at either end of the - both the top and the bottom on short term basis, you tend to see the more concentrated volatile sectors dominating those areas, and the end of 2011 was no exception to that.

St Anne: There's also been a lot of discussion about fixed income ETFs, do you expect any product launches shortly?

Murphy: Yes. It's certainly been a while coming, and ASIC and ASX have finally gotten their act together, and given the final regulatory tick of approval to allow fixed interest ETFs to now be listed and launched in Australia in 2012. And we certainly expect to see that being the big trend in 2012 ETF product launches. All of the key product providers that we talk to have got fixed interest ETFs in the pipeline. So, by the mid-year, expect to see all of the large ETF offerers: iShares, Russell, Vanguard, State Street, expect to see all of them having ETFs or fixed interest ETFs available in the market.

St Anne: Tim, so it's 2012, what are your thoughts of some of the major trends that will happen in the ETF market this year?

Murphy: It's interesting, I mean, 2011 turned out - had been sharp growth in the years leading up to that, tended to - it was a solid rise year. I think that was a function of market flows and sentiment more generally. Most investors were parking their money in the bank, flows into things like term deposits were very strong. Flows into any sort of risk assets, whether it was equity markets, funds, ETFs were stagnant and non-existent. So, you saw the market track sideways last year.

This year with the increase of product availability in ETFs with fixed interest, we certainly expect to see that drive an increase in investor interest, and subsequently assets. But also too we would expect to see the growth trend in ETFs pick up and become more in line with that sort of long-term growth trend we expect to see in the Australian ETF market, which continues to be a long way behind ETF developments in the rest of the world.

St Anne: Tim, thanks for sharing your insights with us today.

Murphy: Thanks, Christine.

Jeffrey Hutton: Australian corporate earnings kicks off this week. To give us an idea of what to expect, here is Peter Esho from City Index. Peter, thanks for joining us.

Peter Esho: Jeff, thanks for having me. It's a pleasure to be here.

Hutton: Well, firstly Peter, I just want to ask you about Gina Rinehart's purported investment in Fairfax. Is she seeing something in the media sector that others aren't?

Esho: Look I think so. I think what we've seen over the past few months is really the cyclical businesses in the Austrian market bounce off their lows. They have come down significantly from their highs during 2011. We saw retail stocks bounce from their lows, very, very depressed lows, of course. We saw the mining services businesses bounce off their lows. We saw resource stock companies themselves, uranium players, but we haven't seen media really bounce off its lows and it's been so depressed.

And I think this is a trigger as an investment, as an endorsement for a business like Fairfax, which has its fair share of challenges. Prior to this rate, it was trading on a price to earnings ratio of about six to seven times. This is a business that's still very profitable, a business that's very dominant in the online content space, a business that recently showed its ability to extract value from an online investment through Trade Me, a business which is shopping around it's radio assets and might find a windfall in selling, realizing value, paying off some debt.

And so, I think this will resonate well with the likes of APN, which is also been very heavily sold off. It's very dominant in the outdoor advertising space and I think also Ten Network Holdings, which has a outdoor advertising business, has got some very smart Australian media personalities on the Board and has recently stripped out costs and well-placed for eventually the cycle to pick up in media and advertising and that will all flow through to the bottom line.

So, I think this is the start of the media sector re-rating.

Hutton: P/E levels have come down quite a lot over the past 12 to 18 months. Do you think this season will be enough to encourage investors back into the market?

Esho: I think this reporting season will show that businesses out there are still earning some respectable numbers, but price to earnings ratio is a very important topic, because you obviously have the pricing, but in terms of the earnings it's not just the level of earnings, but it's the ability of those earnings to grow. If you're paying 20 times, for example, if you assume those earnings don't grow, it will take 20 years for you to make back your investment if 100% of the earnings are paid out.

So, I think price to earnings ratios will adjust on growth assumptions and unfortunately, I think over the next few years we are still in a relatively low growth environment. I don't think we'll get the large price to earnings ratio adjustments unless businesses can show their ability to grow above average levels in this current period. There won't be too many, but I think if you take the ASX 200, for example, you will have a handful of businesses that will show an ability to grow. They are the ones that could see that price to earnings ratios, perhaps expanding a little bit.

Hutton: Do you think we can expect more visibility about full year results out of this earnings season?

Esho: I don't think so. I think management has learnt the consequences of putting out assumptions out there that are the missed, and I think a lot of managers out there just don't have the visibility in their businesses. They don't have the confidence, and I actually think it's good that they are coming out and being quite honest saying they don't know what will happen. They are aware of the consequences of missing. I mean, if you exceed your targets, you get a pat on the back and you perhaps are rewarded a little bit, but the consequences of missing are far larger. So, I really don't think we are about to get that visibility in this reporting season.

Hutton: Okay. Then who are the winners and losers?

Esho: I think the good businesses are - the high quality businesses are not necessarily the businesses that will generate the largest returns in share prices going into this reporting season. Let's take Woolworths, for example. It's a fantastic business, but unfortunately the earnings assumption out there in the market are for growth of between 2% to 6% on what was a very good year last year. So, Woolworths is a very good business, but I don't think it will be a winner in terms of surprising the market or pleasing the market when it prints its earnings numbers.

I think there are a lot of businesses like media, for example, which have been heavily discarded, which will come out with bad numbers, but those numbers might actually be a trigger to see the share prices higher only because of valuations. I think there is a lot of bad news already priced into businesses. If that news comes in not as bad as expected, I think you could see a rebound in businesses like Pacific Brands, for example.

So, I think BHP, Rio Tinto will disappoint. We saw a glimpse into their production numbers over the past few weeks, and I think that disappointment will not be the absolute earnings of these businesses, it will be earnings relative to expectations. Expectations are just purely too high. Iron ore prices consolidated towards the end of 2011. They fell off their highs. They're ramping up their volumes, BHP and Rio Tinto, but the market is expecting growth. Prior periods where the earnings base has been very high, record high levels.

So, I think the expectations are for perfection and if you don't get that perfection, I think you could see a weakness or you might get gains, but I think you'll get better gains elsewhere in the businesses that expectations are so low it could actually come out and exceed really bad expectations.

Hutton: Peter Esho, thanks for your time today.

Esho: Thanks for having me.

Tim Murphy: Hi, I'm Tim Murphy, the Co-Head of Fund Research here at Morningstar. At the end of January, we're going to be transitioning to a new global analyst rating scale for our fund research. Many of you will be familiar with our existing Morningstar recommendations for funds, where every fund that our analyst team goes and visits and assesses, we give a rating of either highly recommended, recommended, investment grade, hold or avoid.

At the end of the January we're going to be transitioning to a new scale, where the scale will read gold, silver, bronze, neutral and negative. So, there is a couple of different reasons why we've done that and some important implications for you, as users of our research and our ratings.

Firstly, looking at why we've done this. There has been some feedback over the years that people would like to see an extra level of granularity among the positive funds that we rate, i.e. the funds that we recommend and that we like. So, to-date we've had two positive rating scales being recommended and highly-recommended. Going forward from the end of January we're going to have three what we'll collectively refer to as the Morningstar medalists.

So we'll have funds that are rated gold, silver or bronze. What that means is compared to the existing scale, funds that are highly recommended today will become gold rated funds at the end of January, while the extra level of granularity around funds that are currently recommended, will mean that some of those will become silver and some of those will become bronze. So therefore users of our research, you have an extra level of granularity to see where our conviction lies at different levels among the funds that we like.

As I said, collectively we'll be referring to these as the Morningstar medalists. So gold will represent funds that we have the absolutely highest conviction in their sector or asset class, but at the same time silver and bronze funds are still equally good funds that can play a valuable role in a portfolio.

So as users of our ratings, and you should ask yourself, is the funds in my portfolio Morningstar medalists and if not maybe look at other Morningstar medalist funds to consider for the portfolio.

This new rating will also bring our rating scale in line with what we're doing globally at Morningstar and Morningstar is a global business, we have more than a hundred fund analysts around the world. And so now, for those of you that are using us across different borders, you'll be able to have the same look and field through our research, whether it's in the U.S., in Europe, Asia or here in Australia.

As clients now looking forward, as I've said highly recommended will become gold, recommended funds today will be either silver or bronze. Funds that are currently rated investment grade which is the highest number of funds we rate at the moment, they will become known as neutral while on the negative side, we'll have funds that are currently rated avoid will become what we call negative.

Outside of that we'll also have terminology to use funds that are either not ratable because of lack of disclosure or under review where there has been a material change to people or process behind a fund.

So, going forward, neutral means a fund that is adequate and should do an adequate job at meeting its objectives, but the Morningstar medalists rated gold, silver and bronze are the funds that we think people should be focusing the most time and attention on and using in your client portfolios.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

Investors often behave in ways that run counter to their own interests. Carl Richards, a financial planner, a blogger for The New York Times, and a contributor to MorningstarAdvisor.com, has written a new book that address this tendency, and it's called The Behavior Gap. He is joining me via Skype to talk about it today.

Carl, thank you for joining me.

Carl Richards: My pleasure; thanks for having me.

Benz: There has been a lot of academic research around this topic of investors who are overconfident and how that can impede their investment results. Let's talk about a sketch that you've got in the book on that front and also the experiences that you've had with investors who are overconfident.

Richards: I think overconfidence, besides fear and greed, it seems to be the little third partner of this little group that's always lurking around big mistakes. I think it's so tricky, because overconfidence is exactly how you would expect an expert to behave. [For instance,] you don't want an underconfident surgeon.

Benz: I don't.

Richards: I don't know anybody that does. You also don't want an overconfident surgeon. So where you cross that line between confident and self-assured, and overconfidence is really, really fuzzy.

It's a problem of experts, and so whenever you are taking care of your own money, or if you are offering advice to other people on their money, you've got to consider yourself at least somewhat confident or else you wouldn't be making those decisions.

The key is to figure out when we cross the line from confident to overconfident. It's really challenging. As I say in the book, if you are not worried about overconfidence, it's probably because you are overconfident.

So I think we just need to be more humble about the decisions we make when it comes to investments, and realize that often our gut is wrong on the investment side. Often it would make sense to run ideas past two or three people.

The other tricky thing about overconfidence that's really a whammy is that if you have a plan that you are very confident in, and you hold on and hold on and hold on, and then you finally capitulate, you are the one that's going to suffer the most. Because the people who bailed out early, they didn't suffer nearly as much as you did by being confident in your plan. So there is this really fine line--confident in your plan stick with it.

Benz: So the big risk of being overconfident in your view is that you can position your portfolio to benefit from one outcome but not really position it for outcomes that you didn't anticipate.

Richards: That's really good point. I think we are notorious for not understanding ... we are very bad in understanding things we don't know. I think often you position ... you think you've got one outcome.

We need to pick an individual stock, or even an industry--let's say I really feel strongly that commodities are going to do well next year. The fear with overconfidence is that you position a portfolio in a way that if you are wrong, you are going to really suffer. There is a conversation I like to have called the overconfidence conversation where you just ... give yourself permission to consider what would the impact be if I am right, and what conversely, and be careful, what would the impact be if I am wrong about this decision? How would my life change?

Benz: So the idea is that you don't want to position your portfolio to benefit from all-or-nothing outcomes. You really want to think about what's the devil's advocate case for this thing that I think I am so sure about.

Richards: There can be reasons we'd want to roll the dice on an all-or-nothing outcome. But you certainly wouldn't want to do that without at least recognizing that's what you are doing.

Christine St. Anne: Last year the Australian dollar enjoyed some record highs, but will it continue to appreciate this year? Today I am joined by City Index's Kara Ordway to give us her view on the outlook of the Australian dollar and some of the major currencies.

Kara, welcome.

Kara Ordway: Thank you.

St. Anne: Kara, what's your outlook for the Australian Dollar? Do you think it will continue to appreciate?

Ordway: Yes, certainly. We've seen a very big rise for the Australian dollar over the first half of 2012. We have seen a high of 1.0573, which is quite a significant move for such a short period of time. What this has really come from, is more of acceptance of what is going on in the Eurozone. We are seeing a bit more risk appetite. Really, those equity markets from six-month highs has meant that people are more willing to buy into these high yielding currencies like the Australian dollar, and that's what has really pushed it higher at the moment. Now, we have seen all-time highs against the Euro, and these highs of 1.05 against the U.S. dollar, so it has really done quite well in the beginning part of this year.

Now, with the lower volatility that we are seeing at the moment, the high commodity prices, this has tended to keep it above these levels and consolidate around the 1.04, 1.05, that we are seeing at the moment. Now, what we also have to consider, is that the Australian dollar is a very high yielding currency, which means it's very expensive for traders to actually short that currency, and that's what's also kept it afloat over the first part of this year. So certainly, a very resilient Australian dollar, compared to what's going on in the Eurozone at the moment.

St. Anne: There has also been some talk about domestic interest rates easing. What implications would that have for the Australian dollar?

Ordway: Yes certainly, alongside all this resilience that we are seeing in these high numbers traded, actually what a lot of traders are saying now, is the Australian dollar is largely overpriced, and we are seeing a lot of technical levels now that are actually indicating that it has been over bought at these levels. One of the key factors in bringing it down would certainly be the RBA rate decisions over the first half of this year.

Now CPI numbers will be a large indicator of whether they have got room to bring those rates down. If inflation is eased then certainly, we will be looking for a rate cut in February, and certainly going on to into the second half of the year. So that's one of the reasons that we could see the Australian dollar actually trade lower, despite it trading so high at the moment. So, we'd be looking forward to that. And actually, saying that it's overbought, we're actually in a very fragile state for the Australian dollar at the moment, sitting on the edge of what's going on in Europe, and it wouldn't actually take a very large catalyst to bring it off those highs, at these overbought level.

St. Anne: Kara, you've mentioned the European situation, what about the euro, would that continue to be resilient?

Ordway: Well, we've seen a very resilient euro over the past couple of weeks, and actually throughout 2011 as well. So, we're trading around the 1.29, 1.30 levels, and despite going down to the 1.26 levels against the U.S. dollar at the first part of 2012, it's actually showing a further bit more of optimism going into the end of January. So, really though looking at the fundamentals, I see no real argument for the euro to trade higher than this 1.30 level.

I think, what we're seeing is these pockets of optimism where people are really desensitized at the moment of what is going on in Europe, and they're managing to push this euro higher at the moment. What's also a factor is that we're seeing record number of shorts in the euro market at the moment. So, that short side of the euro is really largely saturated at the moment. So, any movements upwards creating stops in the market, people having to come out of their short positions, and really when we're seeing these large amount of shorts, it's really indicating that the market is largely exhausted and it's not hard to facilitate a bounce at that time, when we're seeing so many shorts in the market, so that's why it's been so resilient.

Certainly, I don't know whether it will,  this will be able to continue into 2012. For me, as I said, there's no real meaningful reason for it to be trading this high. It's still above the average that it's... from when it opened in 1999. So, we're still on relatively safe levels, but certainly going into 2012, despite some probably capital flight and repatriation of funds back to the Eurozone, no one really knows what the exposure of Europe has to the rest of the world.

So, certainly for me, I'm still bearish on the euro going into 2012, and I think at the moment, the more realistic number we should be looking at is around the 1.20 level, rather than the 1.30 at the moment.

St. Anne: Kara, China's latest numbers indicated some easing in growth, what are the implications for the renminbi on the back of this slow growth?

Ordway: Exactly. Well, we've seen those growth numbers in China actually decline - they were released last week. Where growth was coming in around 10% we're now seeing it more around the 8% mark. So, certainly there is a definitely a slowdown in China occurring that is set to continue into 2012.

Now, what that implication has on the Yuan or the renminbi is likely not appreciate as much as it would first be thought. So, certainly the market expectations of appreciating have declined. China will be more reluctant to let it appreciate in these type of conditions and certainly what we'll see, whether the global conditions improve or decline, it's certainly going to be up to China as to how they appreciate it and when they appreciate it, and I doubt they will take any pressure from the U.S. despite all these factors.

St. Anne: Kara, finally what currencies are you bullish on?

Ordway: The currencies that we are looking at this year, definitely the Canadian dollar. They've got a strong fiscal start, so certainly looking to the Canadian economy for some support. It's not as overbought as other commodity currencies like the Australian dollar and the New Zealand dollar. So, certainly there the Canadian dollar is one to buy.

Also, actually the Norwegian krone. We've seen a lot more activity in the Nordic crosses over the past couple of months as traders try to get exposure within Europe not using the euro. They also have a large fiscal surplus, and so definitely the Norwegian korne is looking good over 2012.

But I definitely think this year will be characterized by a different dynamic in the FX markets, particularly driven by the euro. We are not going to see those traditional risk-on, risk-off trades. The correlation between the euro and the S&P has declined quite significantly. So, we are no longer seeing in terms of risk-on people, buying into the euro and that is really going to create a different dynamic throughout 2012 for the FX market. So, it will be an interesting one to look out for.

St. Anne: Kara thanks for your insights today.

Ordway: Thank you.