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Gold-rated Aussie equity funds and how to buy them

Emma Rapaport  |  15 May 2019Text size  Decrease  Increase  |  
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In a previous article, we explored why none of the Australian ETFs that track the ASX200 has received a Morningstar Gold rating.

Instead, analysts have applied Bronze ratings across all providers.

Morningstar analysts say this is no reflection of their isolated performance. Rather, associate director, manager research, Alexander Prineas says they underperform when compared with some high-performing Gold-rated active Australian equity funds.

"Our preferred active managers have been able to outperform Australian equity benchmarks over the long run, even after accounting for their higher cost, and there is reason to believe the best active managers can continue to deliver," he says.

"However, not all active funds consistently deliver, so good quality passive vehicles stack up well against the average fund."

So, who are Morningstar's "preferred" Australian equity active managers?

Greencape Capital: Excellence across the board

Morningstar analyst Andrew Miles says Greencape Capital's Australian equity growth fund – Greencape Broadcap - continues to reign supreme in its sector because of "an outstanding investment team" and "thoughtful approach".

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Miles says portfolio manager Matthew Ryland is an excellent investor and has managed this strategy expertly since inception in 2006.

"While Greencape’s investment team is smaller than many competitors, its creative research and superior investment culture ensure that the competitive advantage persists," he says.

Miles says Greencape's investment team uses a straightforward, fundamental bottom-up research process that focuses on a company's business model and management.

"They undertake an extensive travel program to understand the business and where it sits in the supply chain," he says.

"The focus is on gathering insights from competitors, suppliers, ex-employees, and other industry participants. This helps them verify whether the underlying businesses and their management teams are superior compared with competitors."

This process has resulted in a portfolio comprising about 60 names. Up to 10 per cent can be held in offshore stocks.

While past performance is no guarantee of future performance, Greencape's track record is stellar. The fund has outperformed the S&P/ASX 300 Accumulation Index in 10 of the past 11 calendar years. Over the 10 years to 30 April this year, the fund has produced a total return (annualised) of 11.87 per cent after fees.

Miles says one "small blemish" is the cost - indirect cost ratio of 1.65 per cent, which is more expensive than the average.

Greencape Capital's High Conviction fund has also received a Gold rating.

Individual investors can directly apply for units in Greencape Broadcap fund via a paper application form, or ask a financial adviser to invest on their behalf. The fund is also available via several retail investment platforms including BT Panorama, Netwealth IDPS, North.

Minimum investment requirements and fees vary depending on how you choose to invest.

Morningstar fund ratings

Fidelity International: A prescient portfolio manager with few equals

An exceptional portfolio manager in Paul Taylor means Fidelity's Australian Equities fund retains its position at the summit of the domestic equity peer group, says Morningstar analyst Andrew Miles.

"Taylor’s patience and low turnover style has shepherded investors through various market conditions, including: the resources boom, global financial crisis, and the oil price collapse," he says.

"His ability to back the long-term industry winners while remaining diversified, has led to index- and peer-beating results, over a range of time periods."

Taylor is backed by a large team of analysts. Disappointingly, Miles says there has been turnover in the analyst team over the last four years, which he thinks has contributed to some uncharacteristic errors.

"One example, Blue Sky Alternative Investments was a relatively small position in the strategy that detracted, after the share price fell after the company's financial disclosures came under increased scrutiny," he says.

Performance over the 12 months to July 2018 recovered after a tricky 2016-17. A significant position in market darling WiseTech Global (ASX: WTC) was fruitful. Over the 10 years to 30 April this year, the fund has produced a total return (annualised) of 11.13 per cent after fees.

Individual investors can directly apply for units in Fidelity Australian Equity fund via a paper application form, or ask a financial adviser to invest on their behalf. The fund is also available via mFund, a settlement service developed by the ASX, which allows individuals to buy and sell units in unlisted managed funds MyNorth, and a range of retail investment platforms including BT Panorama, Colonial First Choice, HUB 24, Netwealth.

Schroders: Skilled portfolio managers and a highly reliable process

Schroder's Australian Equity Wholesale fund is an excellent domestic equity large-cap offering, with strong foundations, skilled portfolio managers, and a highly reliable process, says Morningtsar analyst Ross Macmillan.

"Martin Conlon and Andrew Fleming are among the most insightful portfolio managers in the market, always seeking to balance risk and return over the long term," Macmillan says.

"The experienced duo are capably assisted by a large and knowledgeable investment team, including a head of research, a portfolio manager, seven analysts, two traders, and an investment specialist. The team is thoughtful, perceptive, and motivated."

Portfolio managers undertake detailed bottom-up analysis and valuation of stocks based on mid-cycle earnings. Schroders favours companies that can achieve sustainable superior returns on capital, relative to both their cost of capital and to peers.

Macmillan applauds the considerable effort spent by the team developing a deep understanding of business’ quality and value.

"The team’s patience and conviction in the outcomes from the investment process speaks volumes to sensible investing," he says.

The resulting portfolio is diversified, long-term, and value-orientated, containing around 40-70 stocks.

Schroders endured a difficult period in 2014 to 2015 due to overweight positions in mining/energy stocks, but its performance bounced back in 2016 and 2017. Over the 10 years to 30 April this year, the fund has produced a total return (annualised) of 10.22 per cent after fees.

Schroder's Equity Opportunities Wholesale fund has also received a Gold rating.

Individual investors can directly apply for units in the Schroders Australian Equity Wholesale fund via a paper application form, or ask a financial adviser to invest on their behalf. The fund is also available via mFund, and a range of retail investment platforms including MyNorth, BT Panorama, Colonial First Choice, Perpetual Wealthfocus, HUB 24, Netwealth.

Morningstar Gold-rated active Australian equity funds

Morningstar gold rated aussie equity funds

Source: Morningstar Direct

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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