Morningstar is celebrating its 40th anniversary. Don Phillips joined Morningstar in 1986 as its first managed fund analyst; he established the firm’s independent voice and mentored scores of analysts. He shared his thoughts on Morningstar’s ‘Why’.

Closer to home in Australia, we’ve chosen to celebrate Morningstar’s 40 years in a similar way. We work at one of Australia’s leading providers of investment data and research. We are lucky to have access to a wealth of information. A few of us have shared the insights that have been pivotal in changing our perspectives and approach to investing.

Chris Galloway, Managing Director APAC, 19 years at Morningstar

Chris’ evolving understanding of ‘total wealth’ to include human capital has changed his perspective and approach to investing. He believes it should influence the risk that’s taken on in one’s portfolio.

I’ve always appreciated the holistic asset allocation framework as described in Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance, published 2007 by the CFA Institute. The authors include Roger Ibbotson, the former founder of Ibbotson Associates that was acquired by Morningstar in 2006. This methodology underpins Morningstar Investment Management’s approach to glide path portfolios.

The research paper presents that investors must take human capital and mortality risk into account in earlier life, and then longevity risk in later life. The paper shows how to integrate these factors into individual investors’ asset allocations.

Putting aside the detailed analytical framework, there are some high-level pragmatic principles for investors to understand:

The first is that an investor’s ‘total wealth’ includes not just their financial capital but also their human capital (their ability to generate income from their labour). Typically, younger investors have far more human capital than financial capital because they have many years to work (and have not accumulated much savings). Older investors conversely have more financial capital.

It also delves into safe vs. risky human capital depending on the type of work you do. It explains why, for example, a tenured professor would be considered safe human capital (and therefore could take more risk with their financial capital) versus risky human capital (where your labour income is more uncertain).

Investors should consider their human capital when making asset allocation decisions i.e. explains why a young investor with safe human capital can invest in more risky assets. Also nicely explains as investors age why they should invest less in risky assets.

In particular, Chris likes two stylised charts that explain the concepts well.

CFA Figure 1
CFA Figure 2

Source: CFA Institute

Mark LaMonica, Director of Personal Finance, 8 years at Morningstar

Mark has found great value in interacting with other investors and it has energised his passion for helping Australian investors.

Prior to working at Morningstar, I was a management consultant. My clients were hedge funds and asset managers. I learned a lot about the financial services industry.

The people I encountered within these companies were incredibly smart and driven. Many of them came to their positions by excelling academically. They worked hard and followed the prescribed pathway as they climbed the ladder. That meant adhering to the culture of the firms they worked at and the traditional markers of success in the industry.

Like many investors I couldn’t help but be impressed with these professional investors. I wanted to know the secrets to their success. I wanted to use these secrets in my own portfolio. If anyone knew how to invest it must be these exceptional individuals who could so eloquently discuss their investment strategies and market opportunities.

At Morningstar my perspective changed. It started with the company’s relentless focus on investor outcomes which was a breath of fresh air after working for so long in an industry where the end investor barely registered. We aren’t perfect. But I’ve always felt that advocating for investor outcomes was the trump card in any internal debate. That focus shaped my perspective.

The more I started to think about the investor outcomes the more my perspective on investing changed. It became glaringly obvious that the system was rigged. But not in the traditional way it is portrayed.

Professional investors invest in a way that is the polar opposite to how each of us should be thinking about our own portfolios. We follow their approach at our peril.

Professional investors don’t have the opportunity to be patient because of the relentless pressure to not fall behind an index and risk outflows. This causes them to trade frequently and constantly search for short-term catalysts. Yet it was obvious that the secret to better investor outcomes was having the patience to allow great companies to compound.

Professionals view volatility as synonymous with risk when in reality short-term volatility has little bearing on investor outcomes over the long run. The real risk that investors face is not achieving their goals.

Professionals are governed by strict limits on how they invest and what they can invest in which causes them to champion certain investing styles. They may be eloquent advocates for a certain way to invest. But their advocacy is financially motivated. In reality, there is no single successful approach to investing. We all get to decide which approach resonates with us. It is not what investments we choose to buy that make us successful. It is how we invest.

Professional investors ignore taxes because they don’t know anything about the circumstances of the investors in their funds. And their whole business model is premised on fees that detract from returns. Our focus should be on minimising both.

Over my time at Morningstar, I’ve had the privilege of interacting with thousands of investors. And each time I exchange emails or speak to an investor it drives home the point of what really matters.

Investing is not about investments. It is about the life that each of us wants to build. Our portfolios are not merely numbers on a page. Those numbers are representative of our hopes and dreams about the future. They represent financial security and taking care of loved ones. They are about supporting causes and people that matter to us. What is important is how each of us uses our financial resources to live the type of life we want.

Investing is about achieving our goals. Full stop. We can turn to professional investors for insights in how to get there. And we can turn to them for help. But to do so without the context of the structural differences between the environment a professional investor is faced with is not only unhelpful but also may be detrimental to achieving our goals.

Over the 40 years of Morningstar’s existence there are countless ways our ratings, methodology, data and investment products have helped investors achieve their goals. Yet nothing has come close to the impact of always putting end-investors first. That is a legacy that makes me proud to work at Morningstar and a weighty responsibility for the content we produce to help investors achieve their goals.

My shift in mindset has been invaluable to my own outcomes. I’m not trying to beat an index. I’m not trying to perch my portfolio on the optimal place on the efficient frontier. I’m not trying to deftly rotate my portfolio into the perfect short-term opportunity. I am simply trying to enable the life I want while sleeping at night. My time at Morningstar has taught me that this mindset is the secret to successful investing.

Mathew Hodge, Director of Equity Research, Australia, 23 years at Morningstar

Mathew calls our Morningstar’s Moat Methodology a foundational basis that he applies to finding quality businesses that are built to last.

The field of investment is vast. Information, knowledge, and ideas build incrementally over time, so there isn’t a single piece of research I can point to that sticks with me. The closest thing for me is Morningstar’s moat methodology. It reflects the deep thinking of many researchers over more than 20 years, honed by global experience and robust debate.

What I love about the methodology is the structured approach. It allows analysts to objectively assess business quality and estimate the durability of future returns on investments. Those assessments feed our fair value estimates and our view of if a company is cheap or expensive. The methodology is broadly applicable. By understanding the kinds of moats certain businesses can have, analysts and investors can focus on where key sources of competitive advantage may be. It also helps us to understand how those may erode over time. I apply our thinking on moats every day.

Shani Jayamanne, Senior Investment Specialist, 6 years at Morningstar

I am lucky to have been able to put this piece together and gather the perspectives of my colleagues. My piece focuses on how my journey to get to Morningstar has influenced the way that I invest.

Prior to working at Morningstar, I was working at a storied asset manager that is known for stock picking. I started off in Client Services and was working with transaction histories and account balances all day. It was basically a view of the blueprint to building wealth – I saw how individual investors had built up their portfolios over time. Going into this job, I believed that investing was for the wealthy and had no exposure to it growing up.

Working in this role allowed me to see every type of scenario imaginable played out – including those that were contributing small amounts per week over a long time period. This approach resonated with me on a graduate salary, and it kickstarted my journey with investing. During this process, I asked myself ‘why doesn’t everyone do this?’ The answer is that some people don’t know this is the way to build wealth.

A lot of those people that could drastically improve their outcomes for themselves and future generations have not been exposed to their version of the ‘blueprint’.

I went into financial services right after the Royal Commission into Banking and Financial Services. It was difficult to see the mistreatment of people that wanted better lives for themselves and who trusted individuals and financial institutions to help them get there. People do not invest in funds or take out insurance to watch the numbers tick over in their bank accounts. They do it to create a better life for themselves and their families.

I saw the mistreatment of individual investors firsthand. There were advisers that were on client accounts that the clients had never met before after advice practices had been sold. There were advisers collecting commissions on accounts that they had never advised. I saw inappropriate advice. It lit a fire to share the knowledge of how to create wealth and a comfortable life with people that were seeking to better their circumstances.

I moved over to Morningstar because they were known in the industry for being fiercely independent and advocates for individual investors. Every year, the barriers to investing are lowered further and access to resources and investing information is further democratised. I find a lot of fulfillment in the work that Morningstar does to be part of this solution.

When I came to Morningstar, my investing approach was very much influenced by that ‘stock picker’ mentality. It was focusing on investments and getting those investments right. My journey at Morningstar has involved understanding myself better and what I am trying to achieve both as an investor, and as someone who wants to advocate for and help other investors.

I think ultimately, the assumption is that I have all this research and data at my fingertips which makes picking investments easy. I know a lot of people that work in this space that derive a lot of joy and pleasure from the actual investment process. Thinking about investments and forming a thesis on an investment. These investors are one end of a spectrum. On the other are investors who know that investing is a necessary part of creating the life they want.

I imagine if you are reading this you are part of the former. Despite my career choice I am more the latter. My passion lies is the beginning of the investing process. That is establishing a foundation for success. In my opinion, this is a larger determinant of your success as an investor than picking individual shares, funds and ETFs. I believe that the three largest drivers of success are:

1. Getting invested in the first place.
2. Portfolio structuring.
3. Asset allocation.

Selecting investments brings a lot of people joy. I am much more focused on investing regularly in the right asset allocation and committing over the long-term. I believe that will provide a much starker difference to my outcome than choosing between two stocks.

Lastly, my investment philosophy is individual to me. That is the beauty of investing. It is being able to take on other perspectives – many of which I am lucky to have shared with me by readers and listeners of the podcast. It is understanding what works for you and understanding that all of this is really just a journey to create a better life for yourself and your loved ones.

I’m incredibly grateful for the ability to do this at Morningstar in an environment that is fiercely focused on individual investors and empowering their success.

Bianca Rose, Senior Portfolio Manager, Morningstar Investment Management, 18 years at Morningstar

Bianca uses the Equity Research team’s reports to keep up to date with sectors, trends and markets. These reports can be found through Morningstar Investor.

The pieces of research that I particularly like are the industry pulse reports that are produced by the Morningstar Equity Research team – I find they are a great way to quickly come up to speed on an industry, and I particularly like how they read in an easy-to-understand way, with industry jargon explanations included, rather than assuming the reader knows this.

Understanding the drivers for success of an industry and the competitive environment that each company operates within is one of the key steps to understanding any business you may consider investing in. The overall industry drivers can help an investor understand if the industry will grow or contract. The competitive environment will determine which companies gain or lose market share and how their actions may benefit investors.

Joseph Taylor, Associate Investment Specialist, new to Morningstar

Joseph has found value in the personal finance and superannuation articles. In particular, the asset allocation insights have been relevant to where he is in his investing journey.

“It’s still early days for me at Morningstar as I only joined in April. But I’m loving the front-row seat I have to research, and articles published from different areas of our business.
As this is my first job in Australia, I’ve found the personal finance and Super articles especially helpful. In terms of a specific data point or insight, it’s probably been the importance of asset allocation over time.

Shani often cites a study by Roger Ibbotson, which found it was responsible for over 90% of the variance in investment returns over time. I have always held a lot of cash in my retirement accounts and learning this made me rethink whether it was appropriate given my age. When it came to setting up the asset allocation for my new Super fund, I chose a lifecycle product that decides for me.”

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