Friday Fundamentals Webinar: Portfolio Construction

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<p>Mark LaMonica, Individual Investor Product Manager, discusses the fundamentals of portfolio construction and walks you through the four important steps of building a diversified investment portfolio that meets your goals.</p> <p>Detailed information on each of the steps discussed in the video, as well as the worksheets, can be found in the <em>Morningstar Guide to Portfolio Construction</em>. This guide is exclusive to Morningstar Premium members &ndash; sign up for a Morningstar Premium subscription on the link below to instantly download the full guide and access all other Premium benefits.</p> <p>https://subscribe.morningstar.com.au/site/14-months/premium&nbsp;</p> <p><strong>Mark LaMonica</strong>: Thanks for joining this week's edition of Friday Fundamentals. Today, we're going to talk about the portfolio construction guide. About a year ago, we put out a portfolio construction guide. Since then, it's been one of our most popular features. So, we thought we'd spend some time today going in depth into what that is.</p> <p>So, really, when we talk about portfolio construction, many investors automatically jump to asset allocation and that's certainly important and we'll get there. But really, what we've done in the guide is taking a more holistic approach. Morningstar believes in a goals-based method of portfolio construction. So, we're going to walk you through four steps today, the four steps that are in the guide and we'll show you a couple of tools in the guide and we'll show you a couple of places you can use our website to find investments.</p> <p>So, starting out, we want to talk about really what the traditional approach is, and this is an approach that we disagree a little bit with. But the traditional approach to portfolio construction is you start with a risk tolerance questionnaire. What a risk tolerance questionnaire is, is it's an assessment of how much risk you would take and the way that they do that is they look through what you would do in hypothetical situations. So, the market goes down 25%, what would you do? Would you sell all of your investments and go 100% to cash? Would you stay in the market, would you buy more? So, you go through these series of questions. Generally, this is done either on a website or it can be done via an advisor. And at the end out pops out your risk tolerance. And then, immediately, what that allows you to do is go from that risk tolerance into selecting a portfolio. And that's great if you are really centered around investments. But in Morningstar we're centered around investors.</p> <p>So, we really get down to what is the purpose of a portfolio. And people that professionally manage portfolios have certainly different purposes. But for individual investors the purpose of a portfolio is to achieve something. The whole point of saving and investing is delay gratification now so that you can buy something else later. And really, the difference between the two is what the rate of return is and that's what your portfolio is supposed to do.</p> <p>So, first, let's walk through a couple of reasons why we don't think a risk tolerance questionnaire is a very good approach to take. So, the first reason is that people are very bad at assessing what their risk tolerance is. So, you go through these hypothetical scenarios and that's great, but as soon as there is any stress placed on you, any emotions placed on you, it turns out that what you said you were going to do is completely opposite from what you are going to do. So, if you think about times and the market is going down, every day you are logging on, looking at your account, seeing that you have less and less money; that can be a very stressful event for an investor.</p> <p>So, in cases like that people generally will sell. Same thing when the market is going up. You are sitting around, you are listening to all your friends, talk about about how much the market is going up. Generally, investors take on more risk when the market is going up. They want to invest more. So, that's really the number one problem is that we assume and just have a very poor ability to assess our risk tolerance.</p> <p>The second reason is, what I was mentioning before, we think that a traditional portfolio management or portfolio construction approach really doesn't think about people and doesn't think about goals. So, for example, a risk tolerance questionnaire, you could go in, it could spit out again that you have a very tolerance for risk. So, generally, what people would do is, they'd put you in a portfolio that was heavily weighted towards cash, fixed income, safer assets. Well, what if your goal needs you to earn a higher rate of return? So, we think the goal is most important, not this hypothetical risk tolerance questionnaire.</p> <p>Then, finally, the last reason is that a risk tolerance questionnaire assumes that you are investing for one goal. So, this works very well if you look at retirement, for example. So, it's a goal for most people far off in the future. You are looking for a set amount of money at a certain time in your life. But that's not how any of us live our lives. We have different goals. We want to save for a house. We want to save to help fund our children's education. We want to save for retirement. So, your risk tolerance is really different with all of these different goals because the timeframes are different.</p> <p>So, as I mentioned before, we really take a more holistic approach and that's really where we start out within the guide and selecting a goal. And we'll walk through with the steps that you need to go through, but I did want to acknowledge that really selecting a goal and defining a goal is a very difficult thing for people to do. And it's difficult for a couple of reasons, and we'll show you sort of what information you need to define, but it's difficult because it makes something concrete, right, defining something concrete, thinking about how much money you need for it, thinking about when you want to do it, is scary to a lot of people. So, a lot of people like to avoid this and talk in hypotheticals. When I retire, I'm going to spend three months a year traveling without ever thinking about what that's going to cost or what they need to save.</p> <p>So, setting a goal, sitting down either by yourself with your partner and defining a goal really means that you have to answer four questions. So, the number one question is, how much is this going to cost, and you need to obviously take into account inflation. So, at Morningstar, we have a projected future inflation rate at 2.6% a year. So, obviously, I think everybody knows this intuitively what something costs today does not equal what it's going to cost in 30 years. So, take inflation into account, but you need to figure out an estimate for what you think your goal is going to cost, whether that's saving for a home, whether that's retirement, whether that's a trip that you are saving for.</p> <p>Second thing you need to do is, you need to figure out when that's going to happen. So, when specifically do you want to retire, when specifically do you want to buy your home. It's very important to have an actual timeframe there. And the next thing you need to do is, you need to take stock of where you are financially right now. And we'll get into how the formula works in a little bit. But you need to know how much money have you already saved for this goal and then how much money can you save going forward to try to reach the goal.</p> <p>So, I'm going to jump in, show you a couple of worksheets that we have that helps with this whole process. I'll go through these quickly, but these are all available in the guide. So, I wanted to start out with the goal planning worksheet that you can see here. So, basically, everything that I just mentioned; defining the goal, the dates or when is that goal going to happen, the expected cost which is really important, and the duration is how long you actually want to spend if it's a case like retirement where there is additional spending. So, define your goals, come up with when they are going to be, come up with how much they are going to cost and we have a couple of different goal planning worksheets to look at, intermediate goals, long-term goals, short-term goals.</p> <p>The next thing that I talked about was net worth worksheet. So, really, what the net worth worksheet does for you is it finds what you have now. So, do you have anything saved for this goal? And many people have no idea of what their net worth is. So, this really forces you to go through looking at all the different categories of assets you may have and then also looking at all the different categories you have in debt. And that's really going to show you total assets minus total debt, gives you your net worth. So, that can show you what are the resources you have that can pay for these future goals.</p> <p>Then, finally, a personal cash flow statement. So, everybody hates this, everybody hates budgets. But you do need to figure out how much money you can save for your goal because that's a really important part of the formula that we're about to go through. So, pretty simple. It's looking at your income, looking at your expenses. We're certainly not asking you to categorize every one of your expenses or look at all of them. But you need to figure out how much you make, how much you actually spend every month or how much you're willing to spend, if it's a reduction and this will give you the total monthly cash flow you have that you can actually dedicate it towards savings.</p> <p>So, that's really an exercise, as I said, most people do not like going through. It is necessary for this process and we'll tell you a little bit about that now. And I'm going to talk a little bit about math, and I know everybody hates math. But the good thing is, you don't have to do any of this yourself. There are calculators, but I think conceptually it's really important to understand this.</p> <p>What we're talking about is the time value of money formula. So, we talked before about how savings has really just delayed gratification. So, what you are doing is, you are sacrificing a going out to dinner now for potentially a trip in the future, right, and the difference between those two amounts of money is the return that you actually get. And the time value of money formula is what shows you what you will have in the future. It's pretty simple. There are a couple of inputs that you have and luckily enough, all of the inputs actually just came off of the three worksheets that we talked through. So, if we do complete those, you will have all the inputs.</p> <p>Input number one is, you need to know how much money you have now that can be dedicated to that goal. So, whether that's zero or you've already started saving for something. You have to know the place you are going to start, and you get that off of the net worth worksheet that I showed you.</p> <p>The next thing you need to know is how long do you have to save. So, that's looking at your goal, how far in the future is it. So, you'll have that number. Other thing you need to look at is your &ndash; looking at the cost of the goal in the future. So, that's very important. That's also on that workshop. And then, the final part of this &ndash; I'm sorry &ndash; and the other thing is, how much you can save. So, how much you can save every month, a year, that's another component of the formula.</p> <p>And then, the final piece is that required rate of return. So, generally, if you sit there and look at a time value of money formula, what you are trying to calculate is the future value. So, you are saying that if have $1,000 now, I am going to save $1,000 a month, I am going to earn a 10% return. It will tell you what you have in the future as long as you define that timeframe. But back to the math component of things, I think as we all learned an algebra. If you rearrange all the variables, you can solve for any variable in that formula.</p> <p>So, the next step of this process in the portfolio construction guide is to calculate the required rate of return. Now, the required rate of return is the thing that's going to connect all of the things we just talked about; how much money you have, what you want to save, what the timeframe is and what the future value is. It tells you what you need to earn to actually achieve your goal. So, I'm going to show you a calculator. So, once again, you don't have to do any of this yourself, but I will go on to this third-party calculator that we've shown.</p> <p>It's calculator.net and there is a link to this in the guide. So, I put it in a pretty simple example here. So, future value, so this is what you want to save for. So, let's say, you are saving for a down payment for a house. In this case, you've got $100,000 that you need. What is the period? So, in this case, we're using years as period. So, in 10 years, you need $100,000. What do you have now? You have $50,000. What can you save in one of these periods? So, in this case, $1,000. And it spits out what your return is. So, in this case, you need to earn a return of 5.696%. So, now, you know &ndash; and we'll get into why that's important &ndash; now you know how much you actually have to earn from your investments, from your portfolio.</p> <p>Now, one thing that's important about this formula to realize is that if you start looking at the different variables in the formula, if any of them go up, that will increase the amount of money you have in the future. So, go through that one more time. If you have more money now, you'll obviously have more money in the future. This is assuming positive returns. If you save more, you will have more money in the future and if the time that you can save and invest increases, you will have more money in the future. So, that's really the important part about the time value of money formula because that's how you govern your life, right. So, if you think about people always talk about saving early. Why is it important to save early? Because you have more time to actually invest the money. And what that means in a practical sense is the earlier you start saving, the less you have to save. So, nobody likes saving money. If you don't want to save money, start saving earlier, right? So, that's really why I think it's important that conceptually people understand that formula.</p> <p>So, we'll get back to this required rate of return. So, calculating the required rate of return answers a pretty fundamental question for you. In some cases, it can answer, is your goal achievable? So, in this case, I calculated 5.6%, that's pretty achievable, I think if we look at historic market returns. What if this popped out 25%? Well, unless you are some sort of investing genius, you are not going to get a 25% return over 10 years. So, I think in that case, you really need to take a step back and say, is my goal actually achievable and what can I do to make it achievable? And once again, we talked about some of the different levers you can pull. You can save longer. So, instead of buying a house in 10 years, you can buy a house in 15 years. You can save more every month, right? So, if you are able to rein in your spending a little bit more, save more, maybe you can achieve that goal. It's pretty hard to have more money than you do now. But if somehow you can figure out a way, sell some possessions, I guess, have more money now that you can start out with, then that's great too.</p> <p>So, let me show you &ndash; I'm going to go back into the guide and let me show you, in a reasonable basis, where this return go. So, we have this chart in here that looks at different portfolios. So, you can see the different asset allocation we have between simple stocks and bonds, and it really looks at a 20-year period from 1996 to 2016. And we're looking at Australian investments only here, but it shows you what the different returns are. So, in all stock portfolio, return 9.4%. Obviously, there is now way to know what it will return in the future. So, let's say, your required rate of return that you calculated is below 9.4%. That means you probably have a pretty reasonable chance of achieving that. Once again, obviously, we don't know what future market returns will be and if you think about this was a pretty good period, but there is also global financial crisis you see here, so there was some turbulence around this period, but it can let you know sort of where you need to be. Now, you can see an all bond portfolio performed very well as well with 7%. So, at least it gets you to start thinking about where you need to be from an asset allocation perspective.</p> <p>One of the reasons why this is really important, and we talked a little bit about a risk tolerance questionnaire before, the reason that this is important, because your risk as an investor, if you think about it, or at least the way Morningstar defines it, your risk is not meeting your goal. So, if you took a risk tolerance questionnaire that said you are incredibly conservative, you could not &ndash; and I'll talk about sort of how risk is measured in the financial services industry &ndash; you are incredibly conservative, you should keep 100% of your money in the bank. Well, that's great. So, maybe that is your willingness to take on risk. You have no willingness to take on risk. But if the return you need is 5%, or in our example about 6%, that's the return you need, and you put all of your money into the bank and we all know that obviously the RBA just lowered rates that the yields on bank accounts are going lower and lower. You have a 0% chance of meeting your goal.</p> <p>So, what's really the risk. The risk is, and this is an absolute risk is it will not happen, you will not meet your goal. So, that's how we'd like to think about risk, risk of not achieving your goal. The financial services industry generally talks about risk in terms of volatility. So, volatility are the ups and downs that the market goes through. So, if you go back and look at that chart &ndash; so, we'll go back to this chart &ndash; and we think about volatility. If you look at this upper line, this is the return of stocks. You can see here in the global financial crisis, obviously, there was a lot of volatility, right? And that's the way that we measure things in a risk tolerance questionnaire, what would you do in relation to this volatility of the market going down. But in reality, obviously, if you held on the whole time, you earned a very strong return. So, we think that focusing on goals will make sure that you are not reacting in the wrong way to market volatility, because you understand that your bank account or your investment account may fluctuate up and down over time, but you are still locked into that goal that you are trying to achieve.</p> <p>So, I am going to go back into the guide and show you the next step. So, we've talked about you have now a required rate of return and you can have multiple, by the way. So, if you have multiple goals, you have multiple required rates of return, and what we've added into this guide is from Morningstar Investment Management, they've defined five different portfolios here. You can, obviously, see running from conservative to aggressive. And in each one of these portfolios, there is a different mix between growth assets and defensive assets. And most importantly, at the bottom, there are investment objectives in each one of these portfolios.</p> <p>So, CPI that is simply inflation. So, as I said earlier, Morningstar believes it's 2.6% or will be in the future. So, you can really see what the expected returns are just by adding that up. Now, one thing I would add is that &ndash; and we'll get into this later &ndash; valuation is very important. We do think the market is reasonably valued. So, we don't see a lot of opportunity for outsized investment returns in the future. So, you can see that we had 2.6% to 4%. We're really only expecting 6.6% in our aggressive portfolio in terms of returns going forward. So, that is something to take into account.</p> <p>But, really, we're at this asset allocation step rate now, and you can see there are suggested asset allocations. You can see the different asset classes. And when we talk about asset allocation, what we're really talking about is what is the mix of different assets that are going to be in your portfolio. So, on a very simple level, what are your stocks versus bonds. As we've defined in here, we've gone a step deeper and we started looking at global shares, Aussie shares, different types of fixed income, cash, of course.</p> <p>So, your asset allocation, once again, this is where most people start with portfolio construction, is pretty important. And there was a famous survey that came out. Roger Ibbotson, who is a professor at Yale and actually started Morningstar Investment Management, started Ibbotson Associates, which Morningstar then purchased. He has a famous survey out there saying 90% of the variability of returns comes from asset allocation decisions. So, this mix in your portfolio is very important. But most important, we think, is going through the whole goal definition process at the beginning.</p> <p>So, those are different asset allocations. So, you go through. You can select one of those portfolios if it meets your different objectives. And we do have some more documentation on what each one of those portfolios is trying to achieve. And then the final step and the last step of constructing a portfolio is, of course, finding the investments that you are actually going to put in there. And that's really, obviously, with Morningstar Premium, our research comes into play. So, we cover, from an equity perspective, 1,500 equities from around the world, 450 managed funds, ETFs. So, I do want to show you sort of how you pick investments to actually make your portfolio.</p> <p>So, I'll go back on to our website. We've got a tab called Discover Investments. From a stock perspective, we can start with some of our ratings, so 5-Star or highest-rated stocks. We also look at moats, which is an assessment of the competitive advantage. So, you can go through depending upon what your asset allocation is between Aussie shares, global shares. So, we've got North America; we've got Asia; we've got Europe. I think sort of more importantly, if you're trying to find these allocations, funds and ETFs can play a big role. We literally have all the funds and ETFs lined up in the different asset classes for you, so you can see our highest rated funds and ETFs, from our highest rated Gold down to Bronze. So, that's how you can access our research. It does line up with those different asset allocation targets that you have.</p> <p>And that really completes the last of the four steps that we have in the portfolio construction guide. There's obviously a lot more information in there than I could say today, but those are really the four steps.</p> <p>So, we're going to bring &ndash; I know we've had some questions that have come in. So, we're going to bring Emma out here to &ndash; she can navigate past the light pole &ndash; to see if I can answer any of these.</p> <p>Emma Rapaport: Yeah. So, first up, (Cazz) wants to know &ndash; she is watching, but she maybe missed the beginning &ndash; is there a repeat of this video somewhere?</p> <p>Mark LaMonica: Yeah, absolutely. So, the video &ndash; as soon as this Facebook Live ends, the video will be available on Facebook. We're also going to take the video, we will put it into the same video format that we have on our website, we'll send around an email to everybody, probably not till Monday, but we'll send that email around and you can certainly watch as many times on Facebook or on our website as well.</p> <p>Emma Rapaport: Okay. So, Matthew, wants you to put some of your, I guess, the theories you've been talking about into practice. He sent a long question. He says, I'll read it all and then maybe we can break it down. He says, how should someone construct a portfolio from scratch with say $1 million. Consider transaction costs and timing, should the investor buy up all elements of the portfolio on day one or work towards a model portfolio over time? And then, lastly, how should the investor prioritize what to buy first?</p> <p>So, maybe we should break that down. If you have $1 million how would you start thinking about constructing a portfolio?</p> <p>Mark LaMonica: Yeah. I mean, listen, not to repeat myself, obviously, I would go back and look at what is the goal of the portfolio. So, I think, we talked about this in the beginning that a portfolio is a means to an end. The end is what you are going to spend the money on or potentially leave it for your children, but what is the actual goal for the portfolio. So, I guess, I would start there and figure out &ndash; and perfect example of this is &ndash; so, let's say, you have $1 million portfolio. You do have a relatively limited amount of time until you need to actually spend the money on your goal and the goal is pretty close to $1 million, potentially, you could just leave it in cash. That's really why it's important looking at the goal. So, I would start there, I'd go through that whole &ndash; that goal definition.</p> <p>Emma Rapaport: What are some of the goals that you can identify? I mean, if somebody doesn't know what a financial goal is? Do you have some examples?</p> <p>Mark LaMonica: Yeah. So, I guess, an important thing in that is, we think about financial goals, they're not financial goals, right, they're life goals. So, buying a house is a life goal; it's not a financial goal. There's obviously investment property, but presuming you want to live in your house, that is a life goal that impacts your life every day. So, I think, it's really thinking about like what do you want to achieve in your life. So, if we talk about retirement, retirement is a common one. What do you want your retirement to be? Do you want your retirement to be travelling all the time? Well, that's going to be a lot more expensive than staying at home. Do you want to buy a boat and go sailing on your boat? That's going to be a lot more expensive than staying at home. So, I think, it's really just thinking about and sitting down &ndash; if you have a partner, sitting down with your partner and defining what your life goals are.</p> <p>Emma Rapaport: Can you have multiple goals?</p> <p>Mark LaMonica: Absolutely. Well, we all have multiple goals. I think retirement and housing are probably two really good ones, because I think most people want to buy a house at some point in their life. So, that is generally a shorter-term goal. A longer term goal is retirement. But a goal can be going on vacation, a goal can be planning for an upcoming milestone birthday that you want to have a party for or go on a family trip for. So, a goal can be anything. You have multiple goals, you can have multiple time horizons, obviously, between your goals. They don't all happen at the same time. And because of that really the risk that you want to take on in different investments depending upon the goal can be very different.</p> <p>Emma Rapaport: Okay. So, let's try and deal with (indiscernible) this question. If he has &ndash; so, he has built his portfolio, he has decided his risk tolerance, he has decided his rate of return and the goals he wants to achieve. Should he go out there on day one and just buy everything or slowly invest the money?</p> <p>Mark LaMonica: Yeah, it is a good question. Well, I think there's two different ways to think about it. Maybe I'll quickly go through dollar cost averaging. Let me go through the problem. I guess, the problem with going out there and buying everything immediately. And we did have this question before, and I dug out a couple of stats. So, I looked at &ndash; and the ASX 200 is approaching it again &ndash; I looked at the ASX 200, local market indices, 200 biggest stocks trading on the ASX and it peaked in October 2007. So, we went back, we looked at State Street Global Advisors has an ETF, STW is the ticker on it. We went back and we looked at what would happen if we bought STW in October of 2007. So, it turns out the return today would have been negative 4.42%. So, that's 12 years &ndash; a little less than 12 years. Now, obviously, for people like no, right after that the market fell off a cliff because of the financial crisis but still if you would have gone in and invested your million dollars in October of 2007, you would not be very happy right now.</p> <p>So, what's really important is looking at valuation. So, that's what we believe in as a firm, that's what our equity analysts are doing all day. They are trying to value companies and looking at the valuation of the overall market. So, sometimes the market is expensive, sometimes the market is cheap. Valuation is really important. There is also &ndash; we use the term margin of safety when we are looking at individual investments. But as an investor you want a little bit of margin of safety, maybe you sit there and look at the market and say, I think it is reasonably priced today. Well, I think, you do have to consider the fact that you may be wrong. So, by investing the entire amount you are making a pretty big bet on your view of if the markets are attractive today. So, the idea of dollar cost averaging is instead you slowly invest this money. The markets are obviously going to continue to fluctuate. If you make a huge mistake, the market has a terrible next six months, you will still have some money to invest. So, you are investing at higher prices, lower prices, different prices as the market goes along and it can de-risk that investment a little bit.</p> <p>Emma Rapaport: So, dollar cost averaging, is there a timeframe in which you are thinking?</p> <p>Mark LaMonica: You know, it's really up to you as an individual. What I would say is dollar cost averaging in this scenario if you have $1 million, I wouldn't be talking in weeks. I think people get very caught up in market movements. Oh, the market was down 2% today, it is a great buying opportunity. There is this expression, buy at the dip. That works very well when the market is going up; it works really poorly if the market is going down.</p> <p>Emma Rapaport: Well, that leads into another question we've got. So, Rachel asks if she has built her portfolio, every day she should go and check the market to see what's happening.</p> <p>Mark LaMonica: First of all, I'll say that I check every day. Not that that is a good advice. The problem with checking every day is that people get very caught up in movements and there is a lot of &ndash; Morningstar does a lot of behavioral research to look at how people react to this. And the problem is that people see the market moving around and they think they have to do something. So, everything is sort of pushing you into action and generally, action is bad, because action creates trading costs, action means that you are probably likely going to &ndash; maybe likely is not the right word. You are going to buy things when they are high, and you are going to sell things when they are low and that is the exact opposite of what you want to do. So, I think the best thing to do is to walk away and not look at all these fluctuations.</p> <p>I mean, people talk a lot about housing prices, especially in Australia. That's the equivalent of imagining somebody came up and knocked on your door every day and told you how much your house was worth. Today, I'll give you $500,000 for your house. The next day they walk up, and they say I'll give you $450,000 for your house. That's not going to lead to good behavior, right? You're going to panic when it's going down. You're going to get really excited when it's going up. But none of that changes anything. It's still your house, you still live there. So, think of portfolio that way. Your goals in the future, check how you are periodically, check how you are moving towards achieving your goal, recalculate that required rate of return and go from there.</p> <p>Emma Rapaport: Yeah. I'm curious like how often would you say that somebody should reassess their portfolio or rebalance. The things in the portfolio are going to move around, so therefore, the percentages that you have are going to change. So, how often do you have to think about that stuff and make changes?</p> <p>Mark LaMonica: Yeah. I mean, listen, a lot of literature &ndash; there are different opinions about all of this. A lot of literature that I've seen says once a year. That's generally what I do. So, I'll sit down with my wife once a year in an activity that I'm sure she hates, and we'll go through this and really look at sort of are our goals still the same. So, you have to reassess your goals, people's goals can change, and then how you are tracking against those.</p> <p>Emma Rapaport: Okay. We're coming up to half an hour. So, I'm just going to ask one more question. Let me have a look here.</p> <p>Mark LaMonica: Just try to find one that I won't be able to answer.</p> <p>Emma Rapaport: So, Angus asked how do you decide between actively-managed or index funds or do you use a combination of both?</p> <p>Mark LaMonica: So, listen, I'm certainly not an expert on this. So, I'll just paraphrase what our manager research team does or what our manager research team says. So, as I mentioned before, they assess 450 different ETFs, funds in Australia, obviously run the gamut between passive, active. I think their opinion is that there are certain asset classes where it makes more sense to be in an active fund. And you can certainly go in and look at the way that they've assessed asset classes. So, you need to think about what you are doing. Like, many people say that from a bond perspective, if you want to go into fixed income, active might be more appropriate. If you're going to large-cap stocks, potentially passive might be more appropriate. But I think it's up to each individual investor. I guess, what I would do is, take a look at some of the different investments and the research that we have on them and see what our manager research team says.</p> <p>Emma Rapaport: Check the website.</p> <p>Mark LaMonica: Check the website. Exactly.</p> <p>Emma Rapaport: Great. I think that's all.</p> <p>Mark LaMonica: Okay. Great. Well, thank you guys very much. Thank you, Emma, for only stumping me a little bit. We'll see you next time on Friday Fundamentals.</p>

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Harley Davidson too slow at winning new customers
23/07/2019  Morningstar has slashed its fair value estimate for Harley Davidson, as the iconic motorcycle manufacturer's core customer base declines faster than it can target new buyers.
CBA to put bad year behind it
19/07/2019  The Commonwealth Bank has better times ahead, says Morningstar's David Ellis, who predicts a strong recovery in earnings, which will flow through to modestly higher dividends.
AMP dismay is well-founded, says Morningstar
17/07/2019  AMP appears to be stuck with its life insurance business after regulators scuttled the sale, which is likely to further restrict the group’s struggling wealth management operations.
Looking at Amazon's future beyond Prime Day
16/07/2019  In the midst of Amazon's annual Prime Day, which ends on 16 August US-time, Morningstar looks at the online behemoth's long-term plans.
Investing should make you uncomfortable, says Platinum
15/07/2019  Limiting yourself to locally-listed companies rules out a wide range of industries and the potential upside they bring to a diverse portfolio, says Platinum’s Andrew Clifford.
3 China stocks benefiting from an ageing population
09/07/2019  This trio of opportunities in China spans the disparate sectors of insurance, biotech and gas distribution, as outlined by David Raper of UK-based fund manager Comgest.
Bullish ASX investors may be underestimating rate risk
05/07/2019  Local share investors' continued confidence in the wake of Tuesday's historic RBA interest rate cut may be somewhat misplaced, warns Morningstar Investment Management's Brad Bugg.
Forecast 2019-20: Tough times ahead
02/07/2019  Financial markets face the same challenges now as they did 12 months ago, and investors are at considerable risk even as central banks continue to drive down interest rates.
Rising wages, inflation mean investors shouldn't overlook Japan
01/07/2019  Abenomics have taken hold, bringing the economy out of deflation and creating opportunities in several areas, including small cap stocks.
Tips on building a low-maintenance retirement portfolio
28/06/2019  These strategies can help investors who are either approaching retirement or already retired and don't want to spend hours each week monitoring their investments.
What happens when a fund suspends trading?
27/06/2019  As Woodford Equity Income suspends fund withdrawals, Morningstar's UK director of manager research Jonathan Miller tells senior editor Holly Black what it means for investors.
What is an illiquid investment and should you invest?
26/06/2019  With the spotlight on illiquid assets and unquoted companies as the Woodford Equity Income fund remains suspended, Morningstar senior editor Holly Black talks to fund analyst David Holder about illiquid assets.
Friday Fundamentals Webinar: Portfolio Construction
21/06/2019  Morningstar's Portfolio Construction Guide helps you, the investor, put goals-based investing into practice, as explained by our individual investor product manager Mark LaMonica.
All buybacks are not equal, says Epoch
19/06/2019  Kera Van Valen and her team identify global companies with free cash-flow that regularly return profits via dividends, share buybacks and debt reduction, with Target a recent portfolio addition.
Why sovereign bonds hold enduring appeal
18/06/2019  Neither cash, infrastructure funds or even corporate bonds provide investors with true underlying defensive structures during peak market stress, warns Colchester’s Keith Lloyd.
Safeguarding your finances against cognitive decline
17/06/2019  The risk of financial mistakes and fraud rise exponentially among individuals experiencing cognitive decline, but there are ways to minimise your financial vulnerability.
Investing basics: how to pick stocks like Warren Buffett
14/06/2019  From the Berkshire Hathaway Annual Shareholders Meeting in Omaha, Nebraska, Morningstar director of investor education Karen Wallace reveals how Buffet benefited from sniffing out companies with competitive advantages.
Blend funds to improve SMSF investment mix, says PineBridge
14/06/2019  SMSFs have long been prone to a strong home market bias, but adding a blend of funds can add diversification without blowing out costs or risk, says PineBridge’s Hani Redha.
US stocks ‘rich and vulnerable’ but other markets still attractive
13/06/2019  Amid uncertainty around trade policies and global growth concerns, parts of Australia’s equity market still appeal as do Japan stocks and some domestic credit vehicles, says Schroders’ Australia head of multi-asset.
We’re simplifying global equities, says Magellan CEO
11/06/2019  One of Australia’s most successful professional investors, Hamish Douglass, explains how behavioural biases can harm your portfolio, and why he chose to launch an exchange-traded managed fund.
Antipodes highlights favoured markets, sectors
07/06/2019  Global stock picker Jacob Mitchell explains how investors can get exposure to consumer staples, and why he currently favours emerging markets and parts of Europe.
A wide-moat firm trading at a meaningful discount
06/06/2019  Morningstar equity analyst Seth Goldstein explains why he sees significant upside for Compass Minerals.
Why fund managers are embracing ESG
03/06/2019  Investor demand is just one of several reasons more fund managers are assessing companies against environmental, sustainability and governance criteria.
Why Iluka is bucking the mining company trend
31/05/2019  This rare earths company provides a different exposure to consumer materials, has a clear path to revenue growth and is undervalued, says Morningstar’s Mat Hodge.
3 top picks: politics, equity risk among dominant investor themes
30/05/2019  Global economic policy, equity market risk levels and higher duration in fixed income investments are three key areas Insight Investment’s Steve Waddington is watching over the shorter term.  
3 top picks: Bennelong's Julian Beaumont
28/05/2019  Globally oriented export industries are key pillars of the Bennelong Australian Equity Partners portfolio, says Julian Beaumont.
Using multi-asset funds to lift, smooth investment returns
27/05/2019  Especially as markets dip and volatility ticks up, multi-asset investing can play a powerful role in investment portfolios, explains Insight Investment portfolio manager Steve Waddington.
Friday fundamentals webinar: Getting the most from investing in LICs
27/05/2019  Listed investment companies are popular closed-ended investment vehicles providing an easily-tradeable and transparent way to invest in equities but there are pitfalls, says Morningstar analyst Andrew Miles.
ETFs are democratising investing, says Vanguard
23/05/2019  As exchange-traded funds that take country tilts, invest in fixed income and even provide exposure to unlisted assets take hold, there are new ways to hold a core allocation to ETFs without being overly concentrated, explains Vanguard's Axel Lomholt.
A blueprint for building your financial plan
22/05/2019  A new book offers straightforward advice from start to finish.
The largest risk for young retirees
21/05/2019  Christine Benz talks with J.P. Morgan's Anne Lester about sequence risk, spending volatility during retirement and how to adjust withdrawals over time.
Unpacking the value in Pact Group
16/05/2019  Morningstar equity Grant Slade explains why packaging company Pact Group is undervalued and why new leadership will boost its turnaround strategy.
Car dealership tie-up a potential win
15/05/2019  Morningstar equity analyst Daniel Ragonese analyses the ramifications for the mooted merger between AP Eagers and Automotive Holdings Group.
What to do (and not do) in a volatile market
14/05/2019  Christine Benz discusses how investors should handle the turmoil, whatever the life stage.
Why concentration is the new diversification
13/05/2019  How a concentrated portfolio can also be diversified, and attract principles of quality, valuation, and low correlation with Sam Baldwin, portfolio manager at Guardian Capital
Finding pockets of value in US equities
10/05/2019  The US equity market has rallied after the fall of late last year but pockets of value remain in consumers staples, while in Europe and Japan financial stocks appeal, says Bryce Anderson.
Blocked merger underlines telco sector turmoil
09/05/2019  TPG remains undervalued regardless of any appeal outcome following the ACCC's rejection of the TPG-Vodafone merger, says Morningstar's Brian Han.
Ask the Expert: Link's long-term growth
08/05/2019  Link Administration has an upisde that the market is ignoring because it is too focused on superannuation reforms and Brexit, says Morningstar's Gareth James.
Buffett quizzed on Berkshire buybacks, succession
06/05/2019  Senior equity analyst Gregg Warren asked Buffett and Munger questions during the annual meeting.
3 Top Picks: Lazard's likes in global equities
03/05/2019  Medical waste, medical devices, and the global beverage market are three sectors where Lazard Asset Management's Warryn Robertson sees an opportunity to make solid gains.
How We Invest Your Money: Warryn Robertson
30/04/2019  Finding businesses with stable earnings and predictable cash flows is key to making excess returns for investors, says Lazard Asset Management's Warryn Robertson.
The investor risk of relying on economic forecasts
24/04/2019  Forecasts are usually designed to influence decision-making, and investors should be particularly wary of predictions that don't also provide a probability level, says Morningstar Investment Management UK's Dan Kemp.
Morningstar Minute: Crown Resorts a good bet
16/04/2019  Wynn's shortlived bid for Crown Resorts has only boosted Daniel Ragonese's conviction that the Australian gaming powerhouse is good value.  
Friday fundamentals webinar: Deep dive into ETFs
15/04/2019  Emma Rapaport talks to Morningstar's Alex Prineas about exchange-traded funds and what they can offer for the Australian investor.
2 high-quality US mid-cap stocks to consider
09/04/2019  Ariel's John Rogers discusses why he likes Jones Lang LaSalle and Stericycle. 
Use caution when chasing the latest investing trend
08/04/2019  Marijuana-focused funds produced spectacular returns last year, but they come with significant risks. 
Ask the Expert: John Likos on global growth, franking and hybrids
05/04/2019  Morningstar's director of equity and credit research gives his take on slowing global growth, the impact of Labor's franking policy and whether hybrid securities suit your portfolio.
Behind Wesfarmers' surprise bid for Lynas
04/04/2019  Morningstar equity analyst Johannes Faul explains the motives behind Wesfarmers' $1.5bn surprise bid for rare earths miner Lynas Corporation. 
Ask the Expert: Woolies' $1.7bn share buyback
03/04/2019  Morningstar analyst Johannes Faul explains the motives behind Woolworths' sale of its petrol business and its $1.7bn share buyback.
Does the yield inversion really signal a recession?
02/04/2019  The rare inverted yield curve environment today does not determine the markets tomorrow explains Dan Kemp, chief investment officer, EMEA at Morningstar Investment Management.
How We Invest Your Money: '75pc of our stocks did well so the batting average is good
01/04/2019  Ned Bell explains how Bell Asset Management managed to outperform last year when the market at large was getting beaten up.
What is Lyft worth?
29/03/2019  Morningstar's Ali Mogharabi gives his take on the company's value, how it stacks up against Uber, and the threat that regulation poses.
3 top picks in global small- and mid-caps
28/03/2019  A Danish medical device company, an American computer networking firm, and a Swiss leader in alternative asset management are among the small- to mid-cap stocks on Ned Bell's stock radar.
3 approaches to sustainable investing
27/03/2019  The three main approaches that an ESG-conscious investor can follow often overlap, says Hortense Bioy, director of passive strategies and sustainability research at Morningstar.
Fox Corporation has well-placed bets on live sports, news
26/03/2019  Morningstar has initiated coverage of the Fox Corporation after the Disney merger.
WAAAX on: taking the pulse of small-cap players
25/03/2019  Tech darlings WiseTech and Xero may not yet be household names but they have made some stellar gains, says Ross Macmillan, senior analyst with Morningstar Manager Research.  
Friday fundamentals webinar: new site preview
22/03/2019  In this exclusive Friday Fundamentals Webinar, we preview the new Morningstar Premium website, showcasing the big improvements to how we present our research and data, which will help you make better decisions.
Strategic-Beta ETPs on the rise
21/03/2019  Strategic or smart beta exchange traded products continued to expand in 2018 and now make up 10.5 per cent of Australia's ETP market, says Morningstar associate director, manager research Alexander Prineas.
Why successful investors avoid knee-jerk reactions
19/03/2019  Tuning out from unhelpful market noise is often a far better investing strategy than responding to events that are outside your control, and Brexit is a prime example, says Morningstar's Dan Kemp.
Ask the expert: From Fairfax family to Morningstar members
14/03/2019  Previous roles managing the Fairfax family’s money and at Qantas Super provide several contrasts and comparisons to Matt Wacher’s new chief investment officer role at Morningstar Investment Management Australia.
Earnings season insights: Why record dividends unsustainable
12/03/2019  The record $85bn in shareholder returns for the first half of 2019 isn't likely to be replicated any time soon, says Morningstar’s Peter Warnes, who also singles out a few winners and losers.
More women on US boards, but gender imbalance remains
11/03/2019  Women hold 16 per cent of all company board positions, but there are several caveats including company size and a higher rate of double-up, according to a Morningstar US report.
Ask the expert: Strategic beta ETFs
07/03/2019  State Street’s Thomas Reif explains smart beta exchange-traded funds, how style tilts such as value, size and low volatility work, and how such ETFs respond to higher volatility.
Banks hold up better than expected
06/03/2019  Despite Hayne fallout and other short-term pressures, three of the big four remain undervalued and dividends are solid, says Morningstar’s David Ellis.
Microsoft holds strong upside for investors, says Morningstar
05/03/2019  Very few companies the size of Microsoft can offer 12 percent revenue growth and 15 per cent earnings growth in each of the next several years.
Coles, Woolies and shareholders facing tough facts
20/02/2019  As margin pressures keep profits flat for supermarket giants Woolworths and Coles, the market is gradually realising their share prices are too high, says Morningstar’s Johannes Faul.
The what, how and why of flexible bonds
19/02/2019  Unconstrained bond strategies can outperform traditional fixed income in rising rate environments but the full story is more nuanced, says Morningstar’s Tim Wong. 
'Cheap and hated' China market packed with opportunity
18/02/2019  Describing China's A share market as 'a stock pickers' paradise,' T Rowe Price's Eric Moffett is among a cohort of professional investors rushing to identify the best opportunities.
3 reasons for optimism on Telstra result
15/02/2019  Critics of Telstra's 1H19 earnings result ignore the positive signs on its crucial NBN-proofing and other measures to help secure long-term earnings, says Morningstar's Brian Han.
Don't get decimated in a downturn
13/02/2019  Diversification is your best bet to minimise losses during a downturn rather than expecting an active equity fund to turn defensive, says Morningstar's Russ Kinnel.
What Fed’s pause means for investors
12/02/2019  The US Federal Reserve’s pause on interest rate rises last week was a relief for equity markets and riskier types of credit, but investors should prepare for increases later in 2019, says Mellon’s head of multi-sector strategies.
CBA result highlights challenges facing Aussie banks
08/02/2019  Commonwealth Bank delivered a "messy" and slightly disappointing result for 1H18 amid slowing loan growth and weaker house prices, but the long-term earnings outlook remain positive, says Morningstar’s David Ellis.
3 key investor themes for 2019
05/02/2019  UK equities look undervalued in all but the most extreme Brexit scenarios, says Morningstar Investment Management's Mark Preskett.
Recap of key revelations from the Hayne inquiry
04/02/2019  We retrace some of the key milestones from Kenneth Hayne's banking royal commission, ahead of the final report's public release after 4pm today.
Index investors 'get what they don't pay for'
31/01/2019  The late Vanguard founder, Jack Bogle, was a committed believer in index investing and the Cost Matters Hypothesis, says Morningstar's Russ Kinnel.
TPG decision will shake-up Aussie telco sector
30/01/2019  TPG's abandoning of its mobile network plans holds two powerful implications for the company and its competitors, particularly Telstra, says Morningstar's Brian Han.
4 tech giants look cheap ahead of earnings
29/01/2019  It's a full week of earnings, with Apple, Amazon, Facebook, and Microsoft all trading in 4-star range ahead of their reports.
Spooked investors, market sell-off create opportunity
25/01/2019  US stocks are still considered broadly expensive, but consumer staples is one area where lower valuations are creating opportunity, says Morningstar Investment Management’s Bryce Anderson.
International exposure can bring big benefits, says Morningstar
23/01/2019  Minimising home bias within their portfolios should be a key focus for Australian investors in 2019, says Tim Murphy, director of manager research, Morningstar Australia.
Netflix appeal wanes amid cash burn, competition
22/01/2019  Netflix ended 2018 on a strong note, but its ongoing use of cash and increasing competition from the likes of NBC, Universal and Disney hurt its prospects for 2019.
5 US mega-stocks set to announce earnings
21/01/2019  Chipmaker Intel and household name tech firm IBM are due to announce quarterly earnings this week, alongside Procter & Gamble, Johnson & Johnson and Starbucks.
Finding good returns in alternatives
17/01/2019  When all else is falling, alternative asset classes such as hedge funds, soft commodities, emerging market debt and banks loans can offer decent returns, says Morningstar's Brad Bugg.
Changes ahead for ETF investors
15/01/2019  The inclusion of mainland China shares in more indexes including S&P Global, an expanding menu of active ETFs, and the potential for more ESG-focused funds are among trends investors can expect in 2019.
What to expect from bonds in 2019
14/01/2019  Fixed income assets will be even more important to investors’ capital preservation strategies this year than last, but some sectors are safer than others, says John Likos.
Risk, return and the share price triple threat
11/01/2019  The challenge of creating a quality-focused share portfolio using only Aussie stocks is one of several reasons why a broader focus is important, says Morningstar Investment Management’s Peter Bull.
The rational investor is dead
10/01/2019  The banking royal commission and other inquiries have shown product disclosure regulations alone are not enough to protect investors, especially from themselves, says The Chaser’s Julian Morrow.
Why a share price slump does not always mean buy
09/01/2019  Disciplined investors always urge others to buy on the dips - but not all stock market falls create buying opportunities.
US remains dominant macro theme in 2019
08/01/2019  The resumption of a US-China trade war and the Fed’s ability to stave off recession are the most important global themes for Australian investors this year, says Morningstar’s Peter Warnes.
3 ways to cope in tough investment markets
07/01/2019  Drowning out the noise and creating personal policy statements are among Christine Benz's top tips for sticking to your strategy as the market downturn bites.
Apple shares look attractive
04/01/2019  Our US$200 fair value estimate for the iPhone maker is unchanged as stronger services and wearables revenue should offset China weakness.
Banking inquiry, global market rout among key influences of 2018
24/12/2018  The banking royal commission, pronounced falls in global markets and continuing ETF tail-winds are among the stand-outs of 2018, say Morningstar experts.
Global debt, Aussie housing dominant themes for 2019
21/12/2018  Record global debt alongside mixed signals from the Fed, and the link between Aussie housing, consumption and GDP will be next year’s big macro themes, says Morningstar’s Peter Warnes.
Sydney casino a jewel for Crown
21/12/2018  Its new Sydney casino set for a 2021 open underpins Morningstar’s continued positivity on Crown, despite falling VIP gaming volumes and other challenges.
China could lead an EM rally in 2019
19/12/2018  Asian equities could lead an emerging market uptick in 2019, even after a tumultuous 2018 dominated by the US-China trade war and geo-politics.
State Street: be ready to invest in 2019
18/12/2018  State Street Global Advisors' Kevin Anderson says 2019 will be volatile - but there will also be opportunities for investors who are ready to pivot.
Spotting potential amid Brexit volatility
17/12/2018  Knowing which Brexit scenarios are priced into equity, fixed income and currency markets is key, says James Foot, who sees value in the pound, and potential in short-term volatility.
3 global stocks in power, EV and biotech
13/12/2018  A German utility, Japanese electric vehicle play and US biotech are singled out as three global stocks to watch by UK fund manager Killik & Co.
Beware the allure of geared funds
12/12/2018  Geared funds can offer spectacular returns compared to the sharemarket, but they can equally plunge when things sour, warns Morningstar's Alex Prineas.
Emerging Asia: Lower expectations, outsized opportunities
11/12/2018  Japanese financials and technology firms in Taiwan and Korea are among some of the most attractive opportunities on Morningstar Investment Management’s radar into 2019.
How to reduce risk in your portfolio
10/12/2018  Reducing risk in your investment portfolio doesn't have to mean de-railing your long-term plan, says Christine Benz.