Christine St Anne: In Morningstar�s latest Australian equities large cap report a number of managers shared their views on Australia�s two-speed economy. To get an insight into those opinions, I'm joined by Morningstar�s Tom Whitelaw.

Tom, welcome.

Tom Whitelaw: Thank you.

St Anne: Tom, what are fund managers saying about a possible slowdown in the commodities boom and are they still exposed to resource stocks?

Whitelaw: I mean views vary, and that�s kind of what makes the market out there, but what we certainly did notice was there�s definitely more of a preference for the high quality resources names. So, you're seeing an increase in the weightings in BHP and RIO perhaps and also a reduction in some of the more speculative names out there, because managers are generally -they're not sure what�s happening in global markets. They don�t want to get caught on the wrong side of the trade.

What we also saw was an increase in weightings in the likes of Newcrest for example, so Schroder's actually just added that stock to the portfolio, which is quite rare for them to be holding gold, and that�s really just about gold's role as an insurance policy in uncertain times.

St Anne: If a slowdown is possible how are fund managers responding to this challenge?

Whitelaw: Well, Australia has had an unprecedented boom for the last 10 years, when resources have really kicked off and the level of growth that we�ve seen throughout the market thus far, it�s just not going to be sustainable into perpetuity. So, we�re seeing managers look elsewhere for that growth.

You got the likes of IML, who've done very well over the last 18 months or so, and won our Fund Manager of the Year in 2011. And they have focused on sustainable earnings, so competitive companies with sustainable earnings and strong management teams that are still reasonably priced. That process has done very, very well in markets recently. And also their kind of avoidance of some of the cyclical areas has also helped them avoid some of the more structural issues that have come in.

St Anne: Tom, your report mentioned a number of structural issues playing out particularly in the media and the retail sectors. Were the fund managers that you surveyed virtually ignoring those sectors?

Whitelaw: Again, it�s horses for courses, so you've got some managers like IML for example and Perpetual as well who have stayed clear of these areas, but then you've got other managers, and this is kind of synonymous within the value space. So, we would class Perennial and Legg Mason also in that value space with IML and Perpetual. The two approaches that they've had have been very, very different, so whereas you've got IML and Perpetual, who very much sustainable value approaches, looking for competitive long-terms drivers and sustainability through that. You�ve then got Legg Mason or Perennial Value for example, who are looking more for mean reversion. So, they have actually tried to take advantage of some of these issues we�ve seen in the retailers, the media stocks, the steel players, where valuations are at all-time lows.

They�ve looked to get in there at the bottom, but unfortunately those structural elements have really kind of come against them in the last 18 months, and they�ll tell you that at the bottom of any cyclical cycle everything looks structural. But unfortunately for them we�ve just not seen that kind of pull back just yet.

St Anne: Tom, a number of Australian companies are known for their high dividends, are a lot of these fund managers now seeing the Australian market as purely an income play?

Whitelaw: Yeah. I mean, again that�s something that we were seeing, so whereas before growth was a big driver of total returns. Now in an environment where growth is expected to be a lot lower, people are more concerned about the income component of that total return, so they're looking at those high yielding stocks, so there's been quite a lot of interest in the big four banks, where you get a yield. We've seen a pickup there.

Obviously, something like Telstra has been a very popular holding, and that�s been a big driver - some of the guys who did very well in 2011, as that was one of the strongest performing stocks, and it's really about just adding the income component to that total return, if growth is going to be a little bit smaller, so, yeah, definitely seeing a pickup in those names.

St Anne: Tom, your report also found that a number of fund managers were concerned about the growth outlook. Does this mean Australian investors need to rethink their equities exposure?

Whitelaw: I mean it�s definitely not a time to move wholesale into term deposits. We've certainly seen an increase in term deposits, but now we'd say keep your equities exposure, but maybe just look at diversifying that Australian equities exposure, because Australian�s typically have large home country bias, so there's a lot of that weighting is in Australian equities. We talked about the unprecedented boom that they've had over the 10 years. So, now is probably a good time just to look at diversifying that into a few more international names.

St Anne: Tom, thank so much for your insights today.

Whitelaw: Thanks a lot.

St Anne: Premium subscribers can access the report by going to the morningstar.com.au website and clicking on the Funds tab.