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4 benchmark-beating five-star funds

Glenn Freeman  |  01 Aug 2017Text size  Decrease  Increase  |  

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Each of these Australian equity funds has beaten the ASX 200 10-year average, holds a five-star ranking from Morningstar and a gold, silver or bronze medal.


While Australia's economy continues to smash its record-breaking 26-year run of annual growth, there are signs some sectors will start to drag. The S&P/ASX 200 is at 5,720 points as of today, pushed higher by iron ore and oil producers amid potential structural shifts in Chinese demand.

However, Peter Warnes, Morningstar's head of equities research, suggests momentum will slow, "with falling fixed asset investment leading to lower demand and prices for Australia's coal and iron ore".

"A sharp fall in housing prices would almost certainly push an already struggling economy into contraction, and possibly recession," he says.

Ramping up holdings of Australian companies that have higher US-dollar exposure is one-way investors can mitigate the risk. Investing via managed funds providing diversified exposure to Aussie shares is another.

But which should you consider? The following are all five-star, medallist funds covered by Morningstar.


The gold medal-rated Fidelity Australian Equities [12292] fund is a diversified large-cap portfolio with a growth bias and no major sector tilts.

"Very few can match the vast knowledge, experience, and enthusiasm for investing of Fidelity Australian Equities' portfolio manager Paul Taylor. This fund can make up a significant part of a well-diversified portfolio and is a suitable core holding within an investor's allocation to Australian equities," says Ross Macmillan, senior analyst, manager research, Morningstar.

Though historical performance is no guarantee of future returns, the fund's 10-year return of 5.62 per cent is considerably higher than the S&P/ASX 200 average of 3.62 per cent.

Typically holding between 30 and 50 stocks, it is also quite concentrated, with the top 10 holdings constituting between 55 per cent and 60 per cent of the portfolio. These span a range of sectors including financial services, resources and materials, healthcare, consumer, and industrials/infrastructure.

Active share is moderate relative to peers, between 35 per cent and 40 per cent, though Macmillan also emphasises the fund is "plenty differentiated from the index," having in the recent past taken large active positions in stocks such as SEEK (ASX: SEK) and Domino's Pizza (ASX: DMP).

Morningstar's Tim Wong ranks Greencape's co-founders David Pace and Matthew Ryland, who oversee the Greencape Wholesale Broadcap [14654] strategy, among the best stock-pickers in the Australian market.

The firm's process spans four key factors of stewardship, business footing, milestones, and valuation, which "repeatedly fosters sensible decisions".

Greencape Wholesale Broadcap's 10-year return average is 6.29 per cent.

The fund has a weighting towards small- and mid-size stocks--which would tend to suggest higher volatility--though Wong believes Greencape's approach moderates this.

"The portfolio manager Ryland balances any increased risk very effectively by diversifying across 50 to 60 securities and keeping tabs on sector bets and thematic plays that amplify correlations" as demonstrated by Broadcap's "exceptional and consistent long-term performance".

"This strategy isn't the cheapest around, given the additional performance fee. But ultimately this is a relatively small blemish on one of the finest Australian equity strategies available," Wong says.


Holding a silver medal, the Investors Mutual WS Australian Share [5339] fund has delivered 10-year returns of just over 6 per cent, under the guidance of two of Australia's most experienced value investors, Anton Tagliaferro and Hugh Giddy.

It follows a bottom-up investment process that applies quality and liquidity filters to the S&P/ASX 300 universe of stocks each quarter.

"This helps eliminate speculative companies with excessive debt or negative earnings," says Alex Prineas, senior analyst, manager research, Morningstar.

With a long-term approach and low portfolio turnover, he says the Investors Mutual (IML) team "can be slow to cut long-held names which means this fund goes through bouts of underperformance," but for long-term investors "the voyage should pay off handsomely".

Prineas describes the team's valuation discipline as one of the strictest in the market. It applies various metrics, selected as appropriate for different industries--discounted cash flow for stable industries such as retailing, midcycle price/earnings for cyclical companies, and sum-of-the-parts valuation for banks.


Another IML fund, Investors Mutual All Industrials Share [8742], rounds out this list. It holds a Morningstar bronze medal and returned 6.79 per cent over the last 10 years.

The fund's avoidance of commodity stocks is a notable feature. In this respect, it follows the lead of the S&P/ASX 300 Industrials benchmark, which excludes resources.

The firm's $7-billion asset book--as of 30 June 2016--is widely spread across a range of Australian equity strategies: large-, mid- and small-cap, industrials, concentrated, equity income, and ex-mega caps.

"The team's ability to ferret out unloved pockets of value leads to a slight small-cap skew relative to the market. IML's preference is for certainty, cash holdings, and the exclusion of cyclical miners," Prineas says.

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Glenn Freeman is a Morningstar senior editor.

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