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Morningstar Guide to Fund Investing

Shani Jayamanne  |  30 Sep 2019Text size  Decrease  Increase  |  
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My parents were half-way through their working life when they migrated to Australia from Sri Lanka. Once here, my father took a job as an aircraft engineer at Sydney Airport. Together my parents built a life and retirement for themselves from the ground up—a phenomenal endeavour of which I am very proud.

I was three years old when I first stepped foot in Sydney and have been given the enormous opportunity of a longer runway in Australia. But with that comes a heightened sense of awareness about what it takes to be self-sufficient in retirement. I have always been prudent in the way I use money—an invaluable trait inherited from my parents. And despite years at university spent poring over finance textbooks, what I was less sure about when starting out was how to get a leg-up.

Upon graduating, one of my first jobs was at a fund manager. And it was here that my respect for investing took root. I came into constant contact with financial advisers and investors who had put their trust in funds for decades—resulting in income streams that funded comfortable retirements. And unlike in the textbooks, I saw practical demonstrations of what investing for the long-term could do. This was something I had always sought: financial independence and self-sufficiency in retirement.

A well-worn proverb advisers like to use with their clients stuck with me: 'the best time to plant a tree was yesterday, the second best time is today'. Cliched perhaps, but this kernel of wisdom nevertheless helped me realise that if I were to succeed in being self-sufficient and comfortable in my retirement, I had to start now.

Managed funds provided me with a soft entry into the world of investing and I’ve relied on them throughout my journey. Not that I didn't give other investments a go. I experimented with direct equities but succumbed to over-trading. I monitored the market daily only to make rash decisions that I later regretted. Suddenly I realised I was ignoring the long-term horizon, making doubtful decisions, and creating work for myself.

Nor could I reasonably justify—or ignore—the brokerage fees that were eroding my capital. Much of my portfolio was also taken up by High Interest Savings Accounts (HISAs) and Term Deposits, which I quickly realised stood in the way of my goals. To these problems, funds provided me with an easy solution. I found them to be a convenient way to invest continuously; a place on which I could rely to make the hard decisions and do the paperwork; and ultimately, a way in which I could build the wealth that would allow me to live the life my parents had sought all those years ago. A life of self-sufficiency and comfort.

Given my personal experience investing in funds, I was excited to be asked to write the introduction to this guide. While funds may not provide the same advantages for everyone that I found, this guide explores the factors to consider when choosing a fund and where to go for the right information when it comes to deciding whether funds have a place in your portfolio. We hope you find it useful.

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Shani Jayamanne
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What is a managed fund 

A managed fund (or mutual fund) is a pooled investment vehicle—it combines money from multiple investors and purchases assets chosen by a professional manager. Pooling funds with other investors allows you to access professional managers, who in turn can put your money in varying asset classes which may be difficult for you to invest in directly. This approach may also diversify your risk, for example, if one asset class dips another will be there to pick up the slack.

The first managed fund was established in 1774 in the Netherlands. Known as Eendragt maakt magt—Dutch for ‘Unity Creates Strength’—the fund was created with the sole purpose of providing investors with smaller amounts of capital than institutions, thereby providing an opportunity to diversify and invest . This principle endures today with many managed funds offering retail investors the ability to pool their funds, and, under the aegis of professional managers, discover opportunities that were previously out of reach.

Following in the footsteps of the Dutch, Australia’s first managed fund opened in 1936. Taking as its motto ‘For Security’, it sought to provide Australians with a vehicle through which they could diversify their investments and earn a stable income. These days funds are even more accessible. The barriers to entry are lower. There are many points of access and a multitude of different investment types to choose from . And the scale of the industry has grown exponentially since its humble beginnings in the Netherlands. According to the 2019 Investment Company Factbook, at year-end 2018, regulated funds had $46.7 trillion in total net assets. At the same, individual fund managers—from Jack Bogle and Peter Lynch in the US to Australia’s Kerr Neilson and Hamish Douglass—have become household names for their ability to earn handsome returns for their pool of investors .

In Australia, the managed funds industry is worth almost $3.7 trillion, according to the Australian Bureau of Statistics. A key boost for the industry has come in the form of compulsory superannuation. Ninety per cent of managed funds in Australia are held within superannuation or pension accounts. Unless your superannuation is self-managed, it is likely that your account is held in a managed fund. Globally, Vanguard and BlackRock have emerged as the first pick in the fantasy football investing team—both managing over US$9 trillion between them—becoming goliaths of the industry with a focus on passive investing.

Managed funds: the pros and cons

There are many reasons why investing in managed funds may help you achieve your financial goals.

A crucial benefit of managed funds is the ability to easily diversify your portfolio. Managed funds allow you to invest small amounts of cash across several funds and gain exposure to asset classes that may be difficult to directly access. For example, if you wanted to invest in one share each of the top 10 holdings of Vanguard’s International Shares Index (as at 4 September 2019), you would be forking out $5,998, not including brokerage or currency costs. This is one of the main reasons a managed fund may be a suitable first investment.

Managed funds allowed investors to access to an investment vehicle run by a well resourced team dedicated to making calculated decisions about which asset classes, markets and sectors to invest in and when.

Pooling your cash with other investors may give you exposure to previously inaccessible opportunities and allows you to diversify your portfolio over potentially thousands of shares instead of individual equities.

Table comparing owning a stock versus owning a fund

Managed funds are professionally managed. This means that there is a professional team monitoring your investments and making decisions on your behalf. The responsibility to select investments is outsourced to a team that is focused on meeting the objectives outlined in the fund’s mandate. This frees you up to focus on constructing a portfolio that will help you achieve your long-term goals. We will talk about how Morningstar analysts assess the quality of the professional management a little further on.

Funds are convenient. After the initial application process or investment, there are few other steps to take to manage your investment, especially if you choose to reinvest your distributions (income that is paid from the fund at set intervals). Your fund should issue you a tax statement shortly after the end of financial year that will outline your tax obligations. Convenience is a key advantage for investing in funds. with automatic deposits generally available to enable you to set the amount and frequency of additional investments.

However, this may not be convenient for everyone. There is a lack of control over your investment and all decisions are made on your behalf. To make matters a little worse, it is an industry standard to disclose only the top 5 (or top 10, if you’re lucky) holdings in the funds. This lack of visibility and control is a disadvantage that investors in direct equities don’t face. They can view their portfolio in its entirety and execute trades when they please.

Fees can have a large impact on your investment returns and your ability to meet your financial goals. Fund costs can vary drastically depending on the management and investment style. Understanding the fees you are paying for the management of the fund is crucial.

Performance is not guaranteed. Some assets (such as high interest savings accounts, bonds and annuities) have fixed returns that add a level of certainty to your investment outcome. Managed funds do not offer guaranteed performance and returns can vary greatly, making it difficult to predict investment or income.

Although a large advantage of managed funds is taxation and consolidated reporting, tax itself can be an issue, especially in Australia. You’ll be taxed on the gains made from the manager selling individual holdings, regardless of whether you decide to withdraw from the fund.

What are you getting when you purchase units in a managed fund?

Most managed funds are structured as a unit trust. When you invest in a fund, you are purchasing units in a unit trust. Your investment in a fund will occur at a particular unit price, which denotes the value of the assets in the fund at the time of your investment. These units are priced by Net Asset Value (NAV), which is the per unit price of all the fund assets. These units are priced using the equation below—the net assets in the fund divided by the number  of units in the fund. The fund unit prices rise and fall according to market movements.

NAV = (Assets—Liabilities)/Total number of outstanding units

Many people understandably baulk at the idea of allowing a stranger to invest on their behalf. Tales of fraud such as the infamous 2008 Bernie Madoff scandal—at $64.8 billion, the largest financial fraud in history—only fan these fears. Madoff’s investment vehicle claimed to deliver ‘steady, consistent returns’ for thousands of investors over a period of almost twenty years. He deposited all client funds into one bank account, funding withdrawals with other investors’ money. When the global financial crisis hit in 2008, the devastating extent of Madoff’s Ponzi scheme emerged. Part of the reason Madoff got away with it for so long is because he ran an unregulated investment vehicle. This risk is mitigated by many legal protections, regulatory bodies and safeguards that help to ensure your funds are protected from misappropriation. When you invest with a professional manager, your funds are usually held with a custodian, instead of directly with the manager. Custodians offer a level of separation between your funds and the professional manager, so you can be confident the funds are unlikely to be misappropriated.

As well as the professional management of your funds, your chosen investment manager will provide you with consolidated reporting for your holdings in the fund. Without having to hold and report on a multitude of different assets for your tax liability, holding units within the fund means you benefit from diversification in your portfolio without the reporting burden that usually comes with holding assets directly.

What to consider when investing in a managed fund

Does the fund meet your basic requirements?

Before considering a fund, you must first determine your eligibility and whether the fund will suit your investment objectives. The answers to these questions can be found in the fund’s Product Disclosure Statement (PDS), or in the summary section of the Morningstar fund report.

  • Minimum Investment:
    Are you able to meet the minimum amount to invest in the fund?

  • Additional Investment or Savings Plan:
    If you wanted to make additional investments into the fund or you have a regular amount you want to put into the fund, is the minimum achievable?

  • Country of Residence:
    Are you able to access the fund in Australia?

  • Fund Features (e.g. Dollar Cost Averaging or Auto-Rebalancing):
    Are there any features you require to fulfil your investment strategy?

  • Redemption/Withdrawal Timeframes:
    Does the fund allow you to redeem your investment in a suitable timeframe?

  • Distributions (income issued from the fund):
    How often are distributions issued? If this investment is for income purposes, historically, has the fund distributed in most cases and is it at a convenient frequency?


Can less liquidity in funds actually help you achieve your goals?

Liquidity describes the degree to which an asset or security can be quickly converted to cash. Although access to professional managers and portfolio diversification are attractive features to most investors, managed funds have traditionally been perceived to have less liquidity than other asset classes. When you request to redeem your funds, they must be sold down and transferred after the transactions have been processed. This can take days or even weeks. However, this perceived lack of liquidity may not be a concern for long-term investors who have constructed a robust portfolio . Liquidity can also lead to other unintended consequences when held directly by an investor, including over-trading or impulsive purchases and sales, which can lead to poorer investment outcomes (compared to if the investment was left to its own devices over the long term). This is called the ‘behaviour gap’.


Chart illustrating the 'behaviour gap'

How does the fund fit into your overall portfolio?

Take a step back and look at your portfolio and your existing investments. What are your objectives? Is your portfolio properly positioned to achieve your goals? To help you design a portfolio to meet your objectives in life, we have created the Morningstar Guide to Portfolio Construction. The guide shows you how to identify your goals and construct a portfolio that will help you meet them. If you already have a portfolio it is important to know what you’re exposed to. Are you biased to a particular region? Are you overweight in a particular sector? How much exposure do you have to growth assets (such as shares)? What is the mix between domestic and international investments? Consider the impact the addition of the managed fund will have on your portfolio and whether it will help or hinder your goals. Taking a bird’s-eye view will help you spot multiple funds, ETFs or direct investments that overlap in a particular sector, country or asset class. This approach can also identify sectors, countries or asset classes where you have no exposure. This can help you determine whether a certain fund is right for your portfolio.

If you are unsure where to start or how to answer these questions, Morningstar’s Portfolio X-Ray tool allows you to conduct in-depth analysis on your portfolio, including region and sector analysis. The portfolio X-ray includes a look-through feature that can drill into the individual holdings within the managed fund and provide a holistic view of how your total portfolio is allocated across asset classes, equity sectors, stock style (value vs growth and large cap vs small cap) and world regions.

Image showing Morningstar's Portfolio X-ray tool

How to tell a fund is right for you—process, style and fund mandates

Once you’ve identified what type of fund you need for your portfolio, the next step is to find funds that meet that criteria. However, it’s difficult to discuss process and fund mandates without exploring the debate between active and passive management. Both have the ability to add value to a holistic portfolio, but there are some intricacies to the debate that should be considered when deciding how (or if) to integrate funds into your investment portfolio.

There has been a large shift towards passive investing in the last decade as more and more investors choose low-cost index funds. Passive securities follow indices (for example, the S&P/ASX200—the top 200 stocks on the Australian Stock Exchange), buying and selling only when the index holdings change. In effect, the fund manager is outsourcing the decision on what to buy or sell to whoever is setting the criteria for what securities are included in the index. Without the need for a large investment team to research and select securities, the fund manager can concentrate on keeping expenses low while following the index.

Conversely, active management involves professional managers buying and selling assets in order to beat a specific market index, or benchmark. These funds are typically more expensive, and there is mixed evidence on whether professional managers can outperform the market over the long term.

In 2007, investing legend Warren Buffett famously challenged Protégé Partners, a US hedge fund, to a $1 million bet. It was up to Protégé Partners to pick a basket of actively managed funds to beat the index over a period of ten years. The winner? Buffett. In 2017, Protégé Partners conceded defeat, with the S&P 500 index fund (a passive investment) returning 7.1%, and the actively managed basket returning 2.2%.

While in this instance, it was a convincing win for passive investing, both passive and active investing can have a place within a portfolio. It’s about determining the value each strategy would bring to a portfolio.

Active management offers the flexibility to choose stocks that may be attractive but may not necessarily belong to an index. What follows is an example of an active management success story. Microcap funds look for equities that range in market capitalisation between $50 million to $300 million (at the opposite end of the spectrum are large-cap equities such as the Commonwealth Bank: $146 billion, as at 25 September 2019). Microcap shares are considered riskier as they are less established companies. They have the potential for outsized returns if they can successfully grow. But can equally shrink if the company fails. Active management, using quantitative and qualitative analysis, provides the manager with the opportunity to pick stronger companies and avoid those the manager deems are overvalued or risky. In the case of Perpetual’s Microcap fund, the return has exceeded that of the index. Excess returns above the index are known as ‘alpha’.


Investment growth of Perpetual Pure Microcap Fund vs S&P/ASX Small Ordinaries

Chart: Perpetual Pure Microcap Fund vs S&P/ASX Small Ords

Source: Morningstar Direct; Time Period: 3/09/2013 to 31/08/2019


That said, there are key considerations when assessing active management.

1. Approved Product Lists for Financial Advisers

One important consideration is the financial advice landscape in Australia. A large portion of funds are directed to managers from financial advisers. To operate as a financial adviser in Australia, you must be authorised under an Australian Financial Services Licence (AFSL). Many of the AFSL holders (for example, a bank or company such as AMP) only allow advisers to invest in a select range of products that fit a set of internally established criteria—limiting the funds an adviser can recommend. Due to the sheer volume of funds financial advisers can provide to a manager, the incentive to remain on an approved product list is substantial. The need to stay on lists can influence how a manager invests their funds and motivate the fund managers not to stray from the herd.

2. Closet Indexing

Closet indexing refers to an actively managed fund with holdings that ultimately end up very similar to the index the manager is trying to beat. As fund managers find it increasingly difficult to consistently beat the indexes they are competing against, many resort to similar compositions to maintain consistent results. Not straying too far from the index may prevent the fund manager from losing his or her job. However, many investors in these funds are paying high fees for so-called active management, when the composition of the fund is almost identical to a low-cost passive investment.

3. The Impact of Fees

The late John C. ‘Jack’ Bogle, the founder of The Vanguard Group, is the individual most closely associated with passive investing. Vanguard pioneered the concept of indexing, and Bogle led this charge—believing that instead of attempting to beat the index at great cost, mimicking the index with lower overheads and therefore lower fees would be a great benefit to investors. In 1976, the company opened its first index fund in the US. The rise of low-cost investment options has led Vanguard to be the largest provider of funds in the world, with US$5.6 trillion of assets under management. The spirit of Vanguard’s investor-first philosophy endures today, with company profits being reinvested in the funds to lower investment costs. To respond to the simplicity of Vanguard’s message and the resulting popularity of index funds, active managers have cut their own fees and have been forced to focus on strengthening the value proposition they offer investors.

Regardless of where you stand on the active versus passive debate, Vanguard has correctly emphasised how critical it is to look at the impact of fees when choosing a fund. This does not mean that active funds should be ignored. However, when investing in an active fund, you should scrutinise what, if any, value you are deriving from professional managers making active decisions on your portfolio and the price you are paying for that luxury.

The ‘Price’ section further on in this guide discusses a few measures to understand whether a fund manager may add value to your portfolio.

4. Do different asset classes lend themselves to different styles of investing?

Less efficient markets or asset classes may increase the likelihood that a professional manager can generate market-beating returns. The more efficient a market, the more that security prices reflect the information that is available. In certain markets or asset classes, there are factors that naturally make the market inefficient and can lead to advantages for active managers. These can include:

  • Less popular and followed companies, including small-cap or emerging market companies, may receive less coverage from both professional and retail investors as they are less popular. The reduced focus on these companies can allow savvy managers to take advantage of mis-priced securities.
  • Inefficient markets with less liquidity and higher transaction costs can lead to the mispricing of securities. This can be the case in certain fixed income markets or obscure equity markets.
  • The investor base of a group of securities or market can also lead to inefficiencies, which may result in mis-priced securities. Markets that are dominated by retail investors can increase the volatility of inflows and outflows as they are more likely to fall victim to behavioural biases. In this environment, a skilled professional manager may be able to generate outsized returns.

Does the mandate align with your objectives?

Different fund managers use different methods of choosing the assets in the fund. It is important to understand whether the investment style and process aligns with your objectives and time horizon (how long you’re going to be invested in this fund).

Funds have a mandate that governs where, in what and how they can invest. Understanding this mandate will ensure that a fund is a good match for your portfolio. For example, a fund mandate can restrict a manager to a possible global equities range of 20–95 % (the manager can invest anywhere between those amounts of the fund’s assets in global equities). If the fund manager is confident in the market and deploys 95% of the fund’s capital into global equities, this will change the composition of your portfolio comparative to a 20% deployment. It is important to consider whether a marked change will affect your portfolio or your ability to achieve your expected outcomes.

As well as fund mandates, another important consideration is that fund managers use different styles of investing to manage your money . Popular styles include value, growth, or growth at a reasonable price (GARP). These styles indicate the philosophical approach the fund manager will take when making investment decisions. Investing styles will behave differently in different market conditions and have varying return profiles. Understanding the managers’ investing style can help set expectations for potential risk and potential performance of your portfolio.

Morningstar’s Style Box provides a graphical representation of the investment style of funds, classifying by market capitalisation and growth/value factors. If you are considering a fixed income fund, it classifies funds according to credit quality and sensitivity to changes in interest rates. This is also a data point that can give a truer indication of the investment style than the name of a fund, which does not necessarily correspond to the mandate or investment strategy.

Morningstar Equity Style Box

The Growth category constitutes assets that have demonstrated better-than-average gains in earnings against their peers. There is an expectation that it will continue to deliver high levels of profit growth. These assets tend to perform well when interest rates are low and company earnings are increasing. However, when the economy is cooling, growth tends to suffer.

Value assets, on the other hand, have in general suffered over the last past few years due to the sustained bull market in equities (where growth stocks conquer) and tend to do well in an economic recovery. These stocks are usually characterised by carrying less risk than the broader market and are also lower priced than the broader market.

Blend indicates an asset (typically an equity) that exhibits a blend combination of both value and growth styles., where an asset (usually an equity) will exhibit characteristics from both styles.

Growth and value assets are spread over different market capitalisations which can also affect volatility, time horizon and growth of your portfolio. Stocks are categorised into large, medium and small market capitalisations, which describe the total dollar value of the outstanding shares a company has in the share market. Traditionally, the larger the company, the less volatility it experiences, with less potential for growth. The smaller the market capitalisation, the more sensitive it is to market movements and conditions, but that comes with a higher potential for growth.

The process of implementing fund strategy should also be a key consideration. Is the fund manager doing something unique? Is it unique in a way that it provides a competitive advantage, or unique in that is it is untested and unproven? Again, these questions can be superficially answered by reading a manager’s material. Morningstar reports have quantitative and qualitative measures in fund reports that comprehensively assess these questions by directly interviewing the portfolio managers and analysts making these decisions.

Below are three funds that invest in different sectors, assets and regions. These funds have differing fund mandates, different investing styles and different processes. Although Magellan has outperformed Vanguard and Bentham, it has experienced more volatility than Bentham, and has a wider mandate than Vanguard, which was confined to Australian equities. These factors have resulted in marked differences in outcomes, regardless of when you would’ve decided to withdraw your investment. All funds could serve a purpose in a diversified portfolio and their process, style and mandate should be a key considerations before investment.


Investment growth of Magellan Global vs Vanguard Australia Shares High Yield vs Bentham Global Income

Investment growth of Magellan Global vs Vanguard Australia Shares High Yield vs Bentham Global Income

Source: Morningstar Direct; Time Period: 30/06/2007 to 31/08/2019



Valuable insights can be derived from examining a fund’s performance. That said, putting too much emphasis on a fund’s performance and basing buy and sell decisions on recent performance is a recipe for under performance. We mentioned the behavioural gap earlier in this guide. As a reminder, the behavioural gap refers to behavioural mistakes that cause investors to underperform the fund in which they are invested. In other words, we can measure the performance of a fund over time by looking at the changes in the NAV and we can measure the amount of return that each investor actually receives by looking at fund flows. These numbers are different. The difference between the fund return and the investor return represents the behavioural gap. One cause of the behavioural gap are is emotional bias, es that which affects all of us as humans and investors. Emotional biases stem from impulse or intuition and lead to faulty decision-making because of the influence of fear, greed and/or remorse. It is difficult to control responses to the experience of losing or making money. For fund investors who focus on short-term performance, emotional bias can lead to switching out of one fund which has underperformed and into another that has temporarily outperformed. This is why it is important to not focusavoid focusing too much on performance but instead use it as one of many inputs factors into decision-making.

So what good comes from looking at performance? It can be an indicator of whether the current manager has added value to the fund. Although many fund managers’ websites will highlight shorter-term performance, longer-term performance is more predictive of whether the manager will perform well relative to their benchmark or goal.

Evaluating performance also means evaluating the context in which the investment results were achieved. Performance should be considered in many contexts, including varying market environments, the fund’s objectives and the consistency of returns over time. Key to contextualising performance results are the risks that the fund had to take in order to achieve the returns.

There are many risk measures that will help you understand a fund’s suitability in your portfolio. The following risk measures can be found in Morningstar Fund Reports, summarised in the Performance section.

Downside capture: Downside capture is the percentage of the benchmark’s decline the manager captured (if the fund is following a benchmark).

Maximum drawdown: Maximum drawdown is the maximum loss from peak to trough of the fund—it gives an understanding of the full range of outcomes. Would you be comfortable staying invested in the fund if you lost the maximum drawdown amount? As well as measuring risk in the fund, maximum drawdown also gives you a yardstick for how comfortable you may feel being invested in the fund.

Standard deviation: Standard deviation is a statistical measure of the volatility of the fund’s return. It measures how wide a fund’s range of performance has been—a good measure of consistency of performance/returns. A higher standard deviation is a result of a higher variation in returns—meaning less consistent returns.

Sharpe Ratio: This is a measure of risk-adjusted returns in a managed fund and will assist with determining the level of risk that must be taken to achieve the performance that it has. The higher the fund’s Sharpe Ratio, the more attractive the fund will be with higher risk-adjusted returns. You can also use Sharpe Ratio across various funds, to determine higher risk-adjusted returns (while keeping in mind the context as discussed above).

Beta: Beta is a measure of the fund’s sensitivity to market movements. A beta that is greater than one indicated that movements in the fund’s benchmark tend to be amplified in the fund.

R-Squared: this is a measure of the correlation between a fund and its benchmark and is expressed as a value between 1-100. R-Squared can be useful for determining how accurate a beta figure is. Generally, a high R-Squared value indicates a more accurate beta figure.

Although these measures can be indicators of levels of risk in a portfolio (and in turn, the context of the performance), they are not ultimate indicators of the success or failure of a managed fund. They are considerations that Morningstar analysts use to contribute to how they view the fund, but much of the context is given from direct contact with fund managers and analysts who make the decisions and direct strategy. This includes looking at other funds that the team may manage or used to manage in the past.


A manager is flanked by a team of analysts, traders and other professionals who contribute to the decisions made on a managed fund. Although individual investors traditionally have no access to the people making decisions on their investments, Morningstar considers all involved when issuing a rating on the fund. It’s important to consider their expertise, experience, perceived stability (is there a lot of turnover in the team?) and skill—and how it stacks up against others in their weight division.

Usually, public information about investment professionals is limited to sanitised, company-issued press releases or marketing documents. People are integral to the success and stability of a fund so should be considered as such. Every Morningstar report is written after meeting with direct and indirect decision-makers, and a determination is made whether it adds or detracts value from the fund.


Cost is a large consideration when choosing a fund. Fees charged can have a big impact over the lifetime of an investment and drastically change the dollar outcome.
Although it is easy to stack funds up against each other purely based on their cost, broadening the scope to ensure context to price can mean the difference between a portfolio filled with index funds or a considered portfolio constructed to meet your goals.

1. Are the fees justifiable?

Before organising funds from Price ‘low to high’, there are a few considerations that may justify fund costs.

Fund’s costs relative to its peer group (and whether it’s the retail costs instead of wholesale or institutional i.e. are you able to access it?)

It’s important to examine whether the fund expenses are justifiable when comparing the costs relative to other funds with similar fund strategies, resources and availability to retail investors.

Trading costs, asset sizes and administration costs

Fixed income funds are typically less expensive than equities funds due to trading and administration costs. It would be unreasonable to bucket funds in different categories for direct comparison. These costs can vary significantly, and these costs are intrinsic to running the fund.


Is the strategy and the management worth the cost? Although previously mentioned measures justifying fund costs are quantifiable, this is a decision that is mostly qualitative once the team, their expertise, and the fund strategy is taken into consideration.
Morningstar rates prices of funds using the above quantitative and qualitative strategies. You can find the determinations in Morningstar’s fund reports.

2. How much am I actually paying?

Funds categorise their fees by how the costs were incurred. These are some of the typical fees you may be paying when you are invested in a managed fund. Managed funds do not prescribe to all of the fees listed below but may charge a combination.

  • Management fee/Management Expense Ratio (MER)/Investment Fee:
    This fee is known by a few names, but covers the cost of professionally managing the investment on your behalf

  • Expense Recoveries:
    Expense recoveries are charged if the fund is required to pay expenses on behalf of the fund members.

  • Performance fees:
    Some investment managers charge this fee is they exceed the performance target or benchmark set for the fund

  • Entry/Establishment fee:
    A fee charged to establish your account, or to enter into the fund.

  • Contribution fee:
    A fee charged on additional investments made into the fund after its establishment.

  • Withdrawal/Redemption fee:
    A fee charged to withdraw funds from your account, separate from an exit fee which is for exiting the fund completely.

  • Exit fees:
    A fee charged for exiting the fund.

  • Switching fee:
    A fee charged if you are investing on a platform and you are switching between available investment options.

  • Adviser service fee:
    If you have had or have a financial adviser on your account, they may be charging a fee through your account.

  • Buy/sell spread:
    Although this is technically not a fee, it does impact your investment outcomes. This cost covers the transaction costs that the fund pays when it buys and sells investment assets. Buy/Sell spread ranges depending on the fund.

  • Platform fees:
    A fee for investing through a platform product.


3. How do I invest in a managed fund?

There are a few ways to invest in a managed fund.

Exchange-listed funds

To ease the process of buying and selling funds, the ASX has introduced mFunds. mFunds are a way to directly access Managed Funds through brokerage services in the same way that you buy a share. The benefit of purchasing listed funds is the liquidity you get from having the same trade settlement process as share trading.


A fund platform is designed to ease the administration, management and reporting on funds.

A platform is a centralised repository of several funds from different providers, with different investing styles and objectives. Having access to the platform means you have several fund options to choose from, without having to fill incomplete application forms or jump over administrative hurdles. Think of it as a managed fund supermarket—once you enter the supermarket, you are able to pick and choose which funds are in your trolley. One downside of platforms is that there is often a platform administration fee on top of the managed fund cost, increasing the cost of investing. However, being on a platform allows investors the freedom of switching investment options through their life stages, and as their circumstances change. An investor might be exposed to high-risk, global investments at the peak of their working life, , but as they move towards retirement and their circumstances change, they may choose to switch their investments to a more conservative profile with less volatility, offering stable income.

Directly with the fund manager (unlisted funds)

You are also able to access funds directly with a fund manager. Usually, there are wholesale investments that require large initial investments (but at a lower cost), and retail investments that have lower minimum entry requirements, but are more expensive. Investing directly with the fund manager means a little bit of initial paperwork to set up your fund, but comes with a few significant benefits, including most funds offering fee-free additional investments (if you are making regular contributions) and consolidated reporting at tax time.

4. How does Morningstar rate funds?

Morningstar has a network of more than 110 manager research analysts located across the firm’s offices in Sydney, Chicago, London, and Hong Kong. In Sydney, our team of more than 10 manager research analysts have more than a decade of experience on average. These analysts share global insights, analysis, and investment data.
Our manager research team is responsible for rating funds using the qualitative Morningstar Analyst Rating. The Morningstar Analyst Rating is the summary of our forward-looking view of a fund. It is the outcome of a collaborative process based on a site visit, manager questionnaire, quantitative and holdings-based analysis of the portfolio, and an assessment of key issues identified by our analysts.

Morningstar’s qualitative manager research aims to determine which investments deserve the attention of investors and which do not. Morningstar assesses investment managers based on how we believe they will perform in the future over an economic cycle, against both peers and accepted benchmarks. Our model rewards managers that are open and transparent, have a well-run investment process and, importantly, are good fiduciaries of investors’ monies.

We have identified five areas we believe are crucial to predicting the future success of funds: People, Parent, Process, Performance, and Price. Based on our evaluation of these components, our analysts assign a Morningstar Analyst Rating to funds using a five-point scale ranging from ’Gold’ to ‘Negative’. The top three ratings of Gold, Silver, and Bronze all indicate that our analysts think highly of a fund; the difference between them corresponds to differences in the level of analyst conviction in a fund’s ability to outperform its benchmark and peers through time, within the context of the level of risk taken.

The Analyst Rating does not express a view on a given asset class or peer group; rather, it seeks to evaluate each fund within the context of its objective, an appropriate benchmark, and peer group.

Morningstar rates funds by using five pillars:

  1. People How talented are the fund's managers and analysts? Do the experience and resources match the strategy?
  2. Process What is the fund's strategy and does management have a competitive advantage enabling it to execute the process well and consistently over time?
  3. Performance Is the fund's performance pattern logical given its process? Has the fund earned its keep with strong risk-adjusted returns over relevant time periods?
  4. Parent What priorities prevail at the firm? Stewardship or salesmanship?
  5. Price Is the fund a good value proposition compared with similar funds sold through similar channels?

5. Resources to help you identify funds to invest in

Our analysts interview portfolio managers, analysts, executives and staff who have a direct or indirect influence on the decision-making process of the fund. There are a few sections in the fund report that can help you determine whether it’s going to suit your portfolio.

Morningstar offers a summarised section at the beginning of each report, outlining our analysts’ stance on the five pillars, and the medallist rating (if any). Fund ratings can range from Negative to Gold.


Image showing Morningstar's fund report


As mentioned previously, the Equity Style Box allows you to see where the fund is investing, and the types of investments they are generally making in the fund. Our equity region exposure chart also allows you to see the regions the fund is investing in—this should be considered against your existing holdings in your portfolio (if any) to ensure there is no unintentional overexposure to particular regions. The sectors are covered in the asset allocation section. Using these factors, investors can determine whether the fund is suitable for their portfolio, and whether it is in turn helping them reach their goals.


is an investment specialist, Individual Investor, Morningstar Australia.

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