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3 gold-medal funds with reduced fees

Glenn Freeman  |  19 Feb 2018Text size  Decrease  Increase  |  
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Including stocks from within the S&P/ASX 100 universe, plus some ex-100 companies deemed to be within a "circle of competence," Greencape Broadcap [14654] is renowned for its detailed research.

Its research team has "enthusiasm, insightfulness, and experience," according to Morningstar senior manager research analyst, Ross MacMillan.

"No stone is left unturned when the team decides to research a stock, even if that means undertaking an extremely extensive travel program. We applaud the investment team's research diligence and through-the-cycle investing mindset, which results in a largely style-agnostic portfolio of around 60 stocks," he says.

Companies are assessed across four categories of shareholder stewardship, business evaluation, market milestones, and valuation. These include qualitative and quantitative measures, employing measurement of cash flows, broker models, and overlaying Greencap's own assumptions.

More than two-thirds of the portfolio comprises companies Morningstar regards as holding economic moats (wide and narrow), with around 70 per cent of them within our coverage universe.

Across sectors, the fund holds just under 20 per cent exposure to defensives (consumer, healthcare, and utilities), 25 per cent across sensitive categories of communications, energy, industrials, and technology, and 55 per cent cyclicals (basic materials, consumer, financials, and property).

Small-cap stocks are also included in this growth-leaning portfolio--with between 6 per cent and 9 per cent exposure--versus a maximum of around 5 per cent for the average Australian equities manager within Morningstar's coverage.

According to MacMillan, the fund's annual management fee of 95 basis points--down from 137 basis points in June 2016--is near the average for wholesale Australian equity funds.

A 15 per cent performance fee for beating the S&P/ASX 300 index is also charged: "We think the performance hurdle is reasonable ... [but] this vehicle's total package fee can be higher than average."

International stocks

Within the international equities space, Magellan Global [15699] "remains one of our top picks because of its quality-focussed, high-conviction, risk-aware approach," says Michael Malseed, senior manager research analyst, Morningstar.

"The manager seeks to invest in companies with enduring competitive advantages, enabling them to earn above-average returns on invested capital. Returns have been strong through a variety of market conditions, and long-term outperformance has been significantly aided by superior downside protection," he says.

Malseed regards the fund's base fee of 1.35 per cent as relatively expensive--down from 1.66 per cent and 1.48 per cent in June 2016 and June 2017, respectively. "But a dual hurdle performance fee is well structured. For Australia-based investors seeking exposure to global equities, we think Magellan Global remains an excellent option," he says.

With Magellan receiving considerable guidance from its high-profile co-founder Hamish Douglass--albeit supported by a deeply skilled team--Platinum is in a similar position with its co-founder Kerr Neilson.

"That said, prior reorganisation of analysts into teams has spread mentoring responsibility and alleviated the reliance on individuals such as Neilson," says Morningstar manager research associate director, Tim Wong.

He notes Platinum International [4505] has underperformed over more intermediate periods: "Its results over the medium term have lagged the index and most peers."

"However, it is at least partially a by-product of Platinum's well-tested value-sensitive style, one it hasn't wavered on and that is visible in its conviction in less-explored Asian and emerging markets," Wong says.

That said, it has benefited from holdings in several Chinese companies, such as Sina Corp and Tencent. By market, China accounts for around 25 per cent of the 93 per cent global portfolio, followed by Japan (17 per cent), the UK (11 per cent), South Korea (10 per cent), and the US (8 per cent).

"Platinum is happy to accumulate exposure in regions or sectors it thinks will benefit from valuation normalisation or changing industry dynamics. To mitigate the risks associated with such portfolio biases, the portfolio is well diversified across stocks," says Wong.

"The portfolio managers are also active with currency exposure, largely to mitigate risk, and they short assets worth about 10 per cent to 20 per cent of the portfolio's value."

Platinum International reduced its annual management fee to 1.48 per cent during 2017--down from 1.54 per cent. This comprises a performance fee option, with an ongoing fee of 1.1 per cent plus a 15 per cent fee on returns exceeding the MSCI All Country World Index.

"The fee cut is welcome, though in both options this vehicle still remains relatively pricey," Wong says.

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Glenn Freeman is a senior editor at Morningstar.

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