Introducing the Morningstar Capital Allocation Rating |
Tweet | ![]() |
<p><strong>Mark LaMonica: </strong>So, I'm here with Matt Hodge. We're talking about the Morningstar Capital Allocation Rating, which is replacing the Stewardship Rating. So, Matt, what has changed?</p>
<p><strong>Mathew Hodge: </strong>Basically, we've taken a fresh look at our Capital Allocation Rating and we've decided to focus on three key things, which are balance sheet, investment, and shareholder distributions, and those are the three things that management has control over and they are the three things that management can spend money on.</p>
<p><strong>LaMonica: </strong>And we'll get into those, but why the change?</p>
<p><strong>Hodge: </strong>We really wanted to focus in on the key things that are inputs for total shareholder returns. So, if a company invests well, that's obviously going to be important to their earnings growth, and that's going to reflect over time in the total shareholder return. If it's a more passive business, we really care about: Are they returning the right amount of money to shareholders through the distribution? So, we wanted to focus on those things. And obviously, if you're investing or you're returning money, you obviously want to have a strong balance sheet as well. So, that's an important contributor and can be an important factor in total shareholder returns as well, particularly in downside scenarios.</p>
<p><strong>LaMonica: </strong>All right. So, we talked about why this is important to investors. We've outlined that we are changing the name of this rating. What are the actual ratings that investors should expect to see?</p>
<p><strong>Hodge: </strong>So, as with the Stewardship Rating, with the Capital Allocation Rating, the names of the actual ratings will be the same. We're going to have Poor, Standard, and Exemplary ratings. What does that mean, right? Exemplary is where we're calling out a company for performing really well, or we've got an expectation that they're going to continue to do that in the future, and that might be on the investment front if they are a growth company or it might be on the distribution front if they're a more mature firm that should be focused on returning cash to shareholders.</p>
<p>Likewise, on the Poor side, we want to call out if the company is running an excessively geared balance sheet and taking too much risk with shareholder value. We'd also want to call out if they're investing poorly, investing in the wrong things at the wrong price, or if they're just not sending the right share of that cash back to shareholders, and to be Poor it would have to be substantially less than we would expect, or some combination of all of those three things.</p>
<p><strong>LaMonica: </strong>Let's talk about balance sheet as the first element. So, why should we care about the balance sheet?</p>
<p><strong>Hodge: </strong>Well, you want a company to run a sustainable balance sheet that puts them in a position to invest when they need to, invest in the right things, and also, if it's a more distribution-focused business, that they're distributing funds to shareholders in a sustainable way. If firms run overly aggressive balance sheets, we can see that in downturns like we've just had with COVID and before then with the GFC that they do run the risk of having material shareholders' value destruction via equity issuances at the wrong time. So, that's something we want to be cognisant of. On the flip side, it's also possible for a balance sheet to be undergeared, which means that the company is not minimising its cost of capital. So, we want to take those factors into account.</p>
<p><strong>LaMonica: </strong>And decisions that companies make on capital allocation, one, is obviously to invest in the business. Tell me a little bit about that.</p>
<p><strong>Hodge: </strong>Yeah. It's particularly important when you have a growth business, say, it's technology or a biotech or something like that, where you've got a growth franchise and you're investing and you're investing at an attractive rate of return, we really care about, A) are they investing in the right things, like is the strategy right? Are they doing so at the right price? And is management able to execute? And those are the three things we use when we assess investment. For growth-orientated companies, it is the key driver of total shareholder returns.</p>
<p><strong>LaMonica: </strong>And then, on the flip side, obviously, companies can make decisions to return capital to shareholders. So, talk a little bit about that. What are you looking for there?</p>
<p><strong>Hodge: </strong>Yeah. So, for mature firms and industries or industries that tend to be more kind of passive assets, so like REITs or infrastructure, paying a dividend or making returns to shareholders is an important part of the total shareholder return, particularly if it's a mature business, it's not really growing much anymore. We want to see that that cash flow is being returned to shareholders, particularly if the other options are running an excessively lazy balance sheet or investing in new projects that destroy value. If they're not earning their cost of capital and they're not supporting the strategy, then that money is better off being returned to shareholders, either through dividends or buybacks.</p>
<p><strong>LaMonica: </strong>All right. So, we've got these three different elements. So, how do you bring those together into this rating?</p>
<p><strong>Hodge: </strong>We have a pretty simple flow chart that walks through how we should think about all of those things. So, we rate each of the three items separately, and then we bring together those kinds of sub-assessments, if you like, for the overall Capital Allocation Rating. And we may have situations where we have some pluses and some minuses, or we have one big plus and some other so-so. In those cases, what we really care about is, like I said, if it's a growth company, we really care about our opinion on investment. If it's more of a passive mature company, then we're likely to care more about: Are the shareholder distributions appropriate? So, it depends what kind of company it is as to how we weigh all of those things.</p>
<p><strong>LaMonica: </strong>Great. Well, Matt, thank you very much. It's great to hear about the new rating.</p>
<p><strong>Hodge: </strong>Thanks Mark.</p>

19/05/2022 Local investors were spooked after US retail giants Target and Walmart plummeted overnight as rising prices hit margins and inventory.

19/05/2022 On his recent visit to Australia, Morningstar's global chief investment officer Dan Kemp talks investing narratives, confronting the growing list of reasons to be concerned about markets and sustainable investing.

19/05/2022 Worries about inflation’s toll on earnings sparks Wednesday’s 4% plunge, but stocks are now far undervalued.

18/05/2022 One of the big themes of the year has been the value comeback. What is behind this resurgence after a pretty dismal period, and should your portfolio be tilting in its direction?

11/05/2022 Here's what investors who are worried about a recession should consider today.

11/05/2022 Morningstar analysts have identified TPG telecom as the most undervalued telecom stocks in the ASX 200 detailing multiple catalysts for earnings recovery and growth.

29/04/2022 Exclusive: Hermitage Capital Management CEO Bill Browder talks Putin, Russia, and the next six months for Ukraine

28/04/2022 Inflation, rising interest rates, geopolitical risks, and other things to keep your eye on.

27/04/2022 Morningstar's analyst talks about the Buffett's recent deals, what the stock is worth, and whether Berkshire will pay a dividend any time soon.

31/03/2022 Supply disruptions following Russia's invasion of Ukraine are forcing analysts to consider the possibility elevated prices persist.

30/03/2022 Rising interest rates, strong economic growth and cheaper valuations are driving banking stocks ahead of the broader market.

28/03/2022 Where are entertainment and streaming services headed?

24/03/2022 Problems in global supply chains are an opportunity for WiseTech as its logistics company customers move to replace old software.

23/03/2022 Markets focused on floods and bushfires are missing how insurers are cutting costs, doing more digitally and are looking down the barrel of a lift in investment income.

17/03/2022 Morningstar Investment Management's global CIO Dan Kemp explains why well-intentioned investors desperate for peace in Europe are making dangerous market calls

15/03/2022 Knowledge of the local market, strong branding and a growing subscription service should see the undervalued retailer retain market share in the rapidly growing online sales category, says Roy Van Keulen.

08/03/2022 Higher inflation, rising interest rates and booming commodity markets are driving a major rotation away from the post-pandemic winners, says Tim Murphy, Morningstar director of manager selection.

03/03/2022 Regulators are likely to be less lenient now the buy-now-pay-later sector is part of the fabric of Australian payments.

23/02/2022 Strong commodity prices, cheap valuations and a head start on interest rate hikes means emerging markets are set for strength, says Dr. Joseph Lai of Ox Capital.

23/02/2022 A belligerent speech from a president signalled the start of the latest phase of Russian agression last night, causing markets to wobble and investors to wonder.

15/02/2022 In an extended interview, Morningstar's Peter Warnes discusses the bear market in US technology stocks, interest rates and growth and his approach to investing outside the US and Australia.

13/02/2022 Morningstar equity analyst Shaun Ler explains why he see valuation upside high for MFG even as shares lose steam.

31/01/2022 The Chinese lunar year is almost over, and what a ride it's been. Morningstar speaks to JPMorgan Asset Management strategist Mike Bell about what's ahead.

23/01/2022 Christine Benz discusses how investors should handle the turmoil, whatever the life stage.

18/01/2022 Empty shelves will negatively impact supermarkets in the second half of fiscal 2022 but the impact on long-term earnings is minimal, says Morningstar analyst Johannes Faul.

17/01/2022 Bank earnings, house prices and China risk: Our experts and analysts discuss what they've got their eyes on in 2022.

24/12/2021 Our experts and analysts weigh in on what mattered for investors last year.

21/12/2021 New products, lower fees and a portfolio of undervalued stocks set to help the fund manager right the ship.

10/12/2021 And how does it match up against gold?

10/12/2021 Australian miners to be among the last standing as coal use fades.

08/12/2021 Rebalancing your portfolio is one of those beneficial habits that’s easy to let slide. But year-end is an ideal time to check how your portfolio is tracking against your target asset allocation.

03/12/2021 The gold-rated fund manager shares three ideas with long-term potential.

01/12/2021 Long-term investor sees opportunities where businesses are moving towards a zero-carbon future faster than governments.

30/11/2021 To understand your fund, get to know its underlying index.

29/11/2021 These companies are set to profit from the move to clean energy, says Lazard.

24/11/2021 The results of the COP26 climate summit suggest coal demand is likely to persist for longer than expected.

17/11/2021 And how investors can protect their portfolios.

08/11/2021 Morningstar thinks these moaty companies will remain resilient in the face of inflation and ongoing supply chain challenges.

05/11/2021 Morningstar maintains fair value despite a fall in margins and slower progress on cost reductions.

19/10/2021 These new US-listed exchange-traded funds will invest in bitcoin futures, not bitcoin itself.

15/10/2021 The ESG outperformance narrative is flawed, new research shows.

06/10/2021 Investors may need to hold more growth assets over the coming years, says Morningstar's Jody Fitzgerald.

01/10/2021 And how G8 Education and Link Administration are positioned for long-term success.

30/09/2021 What Reporting Season August 2021 told investors about the health of the financials sector.

28/09/2021 a2 milk is an opportunity to be greedy when others are fearful.

23/09/2021 Covid's winners and losers are returning to their prior trajectories.

21/09/2021 Sequence-of-returns risk matters for both retirees and savers. Here's why.

20/09/2021 Analysts expect the sector to recover to pre-Covid trading levels once borders reopen.

15/09/2021 Rising customer deposits and access to cheap funding helped Australia's banks stave off net interest margin pressure, but analysts see warning signs.

14/09/2021 Morningstar's Hortense Bioy on how to spot greenwashing and how to avoid it.

13/09/2021 Utilities and infrastructure names battle the impact of covid as private equity and pension funds circle.

10/09/2021 Hydrocarbons poised for a comeback.

09/09/2021 Providers have lifted prices after years of a debilitating chase for subscribers at all costs , says Morningstar's Brian Han.

08/09/2021 What shorting ETFs means for long-term investors.

07/09/2021 Morningstar senior analyst Grant Slade says Brambles secular growth trend is intact despite nearterm headwinds. He discusses results from the building and construction materials sector.

03/09/2021 Miners bask in the glow of iron ore prices while bargains remain in coal.

23/08/2021 Post-merger Woodside would be well positioned to deliver on the value we've seen for a long time, say Morningstar analysts.

16/08/2021 But the sector lacks uniformity, says Morningstar's Christopher Franz.

11/08/2021 Higher wholesale electricity prices bode well for AGL, according to Morningstar senior equities analyst Adrian Atkins.

11/08/2021 Morningstar FundInvestor editor Russ Kinnel describes some direct and indirect hedges for inflation protection.

10/08/2021 Copper and iron ore have benefited materially from China’s stimulus and the developed world recovery. But Morningstar analyst Mat Hodge see these benefit as transitory.

05/08/2021 We believe the transaction has a high chance of succeeding.

03/08/2021 The industry still has significant growth potential.

03/08/2021 Is one of the biggest sponsors of the Olympics positioned for an all-electric future?

23/07/2021 Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.

22/07/2021 Mornngstar's Lex Hall catches up with Carlos Gil, chief investment officer at Microequities Asset Management.

21/07/2021 The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.

20/07/2021 The strong performances of global stock markets in 2020–21 are unlikely to be repeated in the coming year says Morningstar's Peter Warnes.

12/07/2021 Morningstar equity analysts warn that equities remain overvalued despite Australia's strong economic recovery.

08/07/2021 Private equity is an exciting area for investors, with lots of hotly-tipped stocks. But there are risks to be aware of, says Pitchbook analyst Dylan Cox.

08/07/2021 Warryn Robertson is looking at French infrastructure, retail pharmacy and tax services.

06/07/2021 Australia's largest banks have excess capital because they cut dividends, were more conservative on lending, divested assets and raised equity last year. Morningstar's Nathan Zaia thinks most of it should be returned to shareholders.

02/07/2021 PEXA burst onto the ASX this week in the biggest float since 2019. Morningstar's Gareth James gives his take on the company's future growth prospects.

30/06/2021 Iron ore prices have been on a tear, boosting the profits of Australia's top miners. How did we get here and is the only way up? Lex Hall sits down with Morningstar's Mat Hodge.

28/06/2021 Morningstar has recently initiated coverage of a food delivery app and a consumer finance product.

24/06/2021 Meeting the deluge of demand is the biggest task for US companies, says Bell Asset Management's Ned Bell.

22/06/2021 Are there still opportunities in the biotech sector now the covid-19 vaccine roll out is underway? We ask International Biotechnology Trust manager Ailsa Craig

21/06/2021 Morningstar's director of Asia equity research is confident the e-commerce giant will bounce back.

18/06/2021 A wide moat and attractive dividend potential are among the key takeaways of Woolworth's decision to demerge from the liquor and hospitality group.

15/06/2021 Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.

11/06/2021 Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.

10/06/2021 Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.

09/06/2021 Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.

08/06/2021 They’re building an empire.

07/06/2021 A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.

04/06/2021 As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio

03/06/2021 The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.

28/05/2021 4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.

28/05/2021 The SEC continues to sort out its regulatory concerns.

27/05/2021 We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.

25/05/2021 Covid-19 has enhanced rather than impeded the future for global infrastructure, says Sarah Shaw of 4D Infrastructure.

24/05/2021 Tribeca's Jun Bei Liu also explains why she sees opportunity in sleep apnea specialist ResMed as well as Treasury Wine Estates.

19/05/2021 American Century Investment's Patricia Ribeiro sees growth in Chinese battery technology, biologics, and building materials in Latin America.

18/05/2021 Robotics is a fast-growing area of tech, creating opportunities in medical, logistics and life sciences sectors and much more.

18/05/2021 Square's Bitcoin purchase is more marketing than operations

10/05/2021 If Elon Musk ends up delivering, we might need to raise our fair value to US$1500 a share.

07/05/2021 Banks and resources are poised to deliver dividends, and Treasury Wine Estates and BNPL are worth a look, says Jun Bei Liu of Tribeca's Alpha Plus long/short fund.

05/05/2021 Digital banking, ecommerce and 5G are among the key trends set for rapid growth, says Patricia Ribeiro of American Century Investments.

04/05/2021 Analysts have made changes to the fixed interest, property, cash and equity allocations of Morningstar's Model ETF Portfolios to take advantage of the current market environment. They've also refreshed some of the funds in the portfolio.

30/04/2021 The stock market and the economy are not the same. Here's why.