Balancing profitability and price

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Glenn Freeman: In this edition of "How We Invest Your Money", I'm speaking with Peter Bull about the global equities portfolio within the broader multi-asset approach of Morningstar Investment Management. He'll also touch on the global interest rate policy and how that plays into their decision making along with some various country exposures and how the portfolio changes in reaction to events around the world. Peter, thanks very much for your time today. Peter Bull: Sure. Freeman: Now, we're talking today about global equities. How important is the global equities business within the Morningstar Investment Management's multi-asset portfolios? Bull: So, look, it could be anywhere from say 10 per cent or 20 per cent up to greater than 60 per cent. If you look at growth assets as a whole, global equities – Australian equities, which we tend to be a bit underweight with and REITs and that type of thing. So, it's quite a big lever. And if you look at the movements, the price movements and return fluctuations in the multi-asset portfolios, the biggest driver of that obviously is the growth assets. Freeman: And so, what does that portfolio look like at the moment? Bull: So, we've got a couple of global equity portfolios and trust managed funds in Australia. One is International Shares Fund, which is broad, it has over 300 companies; and one is more concentrated Global Shares portfolio with 40 stocks. But really, they are built quite similarly where we're looking at companies that are profitable, but still attractively priced. Right now, telecom is the cheapest global sector, telecoms and financials. And when people – investors head in that direction, they should be aware, right, that those maybe relatively attractively priced, but they also come with more fundamental risk. They are bit more cyclical. There are more capital requirements. There is definitely more leverage when you start heading into these cheap sectors, these cheap global sectors. Freeman: In terms of percentage of the – you said it can range from anywhere from up to 60 per cent but down to, say, 20 per cent. What sort of percentage figure is equities now within the – I mean, portfolios? Bull: So, I would say – again it depends. With the quite broad ranges, we have two sets of multi-asset portfolios. One that are more – is more and more SAA relative or you know within ranges to those strategic asset allocations and then as literally you know within 10 per cent of 70 or 50. And then we have our Real Return Funds, where the objective – wider range is. So, the objective maybe CPI + 3. My job is to really focus on the equity portfolios and try to find the best reward for risk. And we generally do that in a benchmark unaware fashion. We don't – we think there are many benchmarks or indices out there, equity indices where there is, for example, in Australia there's a lot of gearings, lot of fundamental risk and cyclicality, and resources, and financials that you don't have to sort of weight into so much. You know we're not going to slavishly follow the benchmark. Freeman: And global interest rate policy and we've just recently had yet again the Reserve Bank of Australia stayed still on rates. Does that – how does that play into your part of the portfolio? Or does it at all? Bull: Look, that's a very good question. It does come into the portfolio because we want to make our portfolio immune to as many factors as possible. And we don't want the essential, sort of, returns of the portfolio and the characteristics of the portfolio to just to be able to turn on a dime on commodity prices, interest rates. These are risk factors that generally you're not necessarily compensated for. We're not against financials, as a category, but we tend to be quite aware of the fundamental risk involved and size those positions accordingly. Freeman: And sort of in broader – like outside the domestic picture and your international exposure to equities, how do you adjust your country exposures or how frequently do you change those in reaction to things happening globally or otherwise? Bull: So, again, it's another – it's one of those things within developed markets. It's really – I think sector is a bit more important than what country you're in. You know just to give an example, Colgate, right, so this is a literally a 200-year old toothpaste company in upstate New York, Colgate Palmolive, and over 75 per cent of its revenues are offshore, right. So, you can talk about regions and countries and how that changes or another example is, people are familiar with Samsung. I think something like 9 per cent of its revenues are domestic in South Korea and 35 per cent come from the U.S. So, really what matters is what business these companies are in. You know another one, say, Qualcomm that we have, sort of, a legacy tech, very good company. Good things tend to happen to these types of companies. It could be bought by Broadcom or it could be blocked, or they could try to acquire NXP. Or they can return capital to shareholders, right. Any one of those we're more or less okay with, they're not bad outcomes for the investors and even where you've got this sort of cross-border considerations and regulatory issues, I think we'll come out okay with that company.

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