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Global equity income has been an increasingly popular destination for investment in recent years. With returns from cash and yields on fixed income at low levels, the desire for income has encouraged many investors to widen their scope of potential asset classes.

Historically, equity income investors in the UK have limited themselves to UK equity, now they are looking further afield. The question has been raised as to whether a separate IMA sector for Global equity income is needed. Much depends on investors’ time horizons. If holding for the long-term then a comparison of Global growth and Global income is perfectly valid and indeed most equity income managers believe they can at the very least hold their own in the wider sector. However, if investors are comparing the performance of funds in the short term then an IMA defined sector is useful, because the performance profile of income and growth funds is very different.

Using Morningstar’s Global Large-Cap Value Equity peer group (into which most Global income funds fall) as a proxy for the income sector, we can see the differences between the two categories. In 2011, to the end of August, the IMA Global Sector is down 9.78% while the Large-Cap Value peer group is down 8.05%. In contrast during 2010, the IMA sector rose by 15.85% while Large-Cap Value was up 11.34% and similar differences can be found in 2009 and 2008. Why is the performance profile so different? To some extent it is due to sectoral differences driven by the search (or not) for yield. On average, Large-Cap Value funds currently hold 13% in Communication Services, while the IMA peer group hold only 6.3%. In contrast, for Basic Materials, Large-Cap Value hold 4.5% compared to 8.1% held by the IMA peer group. Regardless of whether a standalone IMA sector eventually results, investors need to be able to compare like with like and whilst the comparison of Global Income and Global Growth is not quite apples and oranges it may well be like comparing peaches and nectarines.

By Richard Whitehall

To join the conversation on the OBSR blog, please follow this link:

http://www.obsrfundratings.co.uk/Default.aspx?alias=www.obsrfundratings.co.uk/blog

Posted in: Morningstar OBSR Commentary,

Join Morningstar’s  Jackie Beard for a panel discussion on the challenges faced by an investment board at 1pm on 14 September 2011.  This is particularly  relevant in the current environment, with the ever-increasing burden upon non-executive directors as stewards of shareholder capital.  The session will also look at why their role gives the fund a distinct advantage over its open-end counterparts and the different ways in which they can add value for shareholders.

Jackie would like to make sure this session addresses any concerns that you, our advisers, have, and to answer the questions that you want answered. So we  invite you to post any questions on corporate governance of closed-end funds that you may have on the blog between now and 13 September.   The panel really is an outstanding line up with

Scott Dobbie CBE; Gill Nott OBE; Hugh Aldous; Peter Arthur and James Saunders Watson. It’s not often one gets the chance to question such an esteemed group of people, so don’t miss this opportunity. While it’s unfair to single out individual panel members, Ms Nott’s OBE was for services to financial education and Mr Dobbie’s CBE for services to financial regulation.

Register for the event by clicking here.

Posted in: Events, Morningstar, Research,

It has been our contention that with such an extended degree of leverage within the developed world  (a hangover from the last 2 decades), the only solution was an extended period of very low interest rates to keep the credit system from failing – thereby permitting both corporates and individuals to raise their savings rates, both of which have or are now happening. This reliqification process has been at the expense of the public sector which has extended its debt levels in Keynesian style fashion to be counter-cyclical.

However, and unlike previous economic cycles, the second phase of the recovery led by corporate capex (capital and labour) is being truncated in the developed world as the previous debts are still very high and the corporate sector is nervous. With investors looking to the private sector to take up the running they are hiding as governments and global authorities fail to address what looks to be more like profligacy than stimulus. In many ways this is encouraging. Europe has been living in a dream world for decades and the capital markets are saying reform or fail – ultimately a necessity. Ditto the US where the deck chair shifting fails to address legitimate structural issues.

The question is how far is this priced into asset markets – gold continues to romp away based upon negative interest rates, huge investment buying and fear.  Bond yields are plunging to the 08 lows even though the financial system is less geared and notionally less vulnerable. However, as developed world and indeed developing world growth rates fade, the move in yields is understandable. Equities are moving to discount a recession – with PE multiples already at compelling valuations, a recession-inspired type decline in earnings implies more potential downside for equities but the discounting mechanism is rapid and of course the recessionary scenario may fail to materialise. Longer term, the structural growth of the emerging markets remains the key hope for earnings globally – if not the answer to the domestic issues in the developed world.

The markets are currently in a negative feedback loop which is only likely be to broken by strong action from the authorities. The markets are rioting to force their hand – a process where compelling valuations offer limited protection.  Investors’ actions here must be dictated by time horizons. Key blue chip yielding stocks are at generationally cheap levels and already appear to offer good value.  A long-term mindset would suggest a long-term view would offer significant upside to patient investors.  Those of a more nervous disposition may wish to wait and see how inspired and complete the actions by the authorities actually are before committing to the markets.

By Peter Toogood

To join the conversation on the OBSR blog, please follow this link:

http://www.obsrfundratings.co.uk/Default.aspx?alias=www.obsrfundratings.co.uk/blog

Posted in: Morningstar OBSR Commentary,

After setting out a series of requirements necessary for the US to maintain its AAA rating, S&P has followed through by issuing a downgrade to AA+ as the country fails to meet the targets.

It is hard to blame the agency for its decision – the debt metrics in the US appear increasingly anomalous in the AAA universe.  Indeed, the debt/GDP figures are expected to continue to rise given the high budget deficit and the absence of a meaningful long-term consolidation plan.  This is a development that many, including Jim Leaviss at M&G, have warned about for some considerable time.

What is the likely outcome?  The investment landscape has clearly changed to some degree, given that almost all assets are priced off the “risk-free” US Treasury.  In the very short term, we are watching the money markets carefully for signs of stress but our expectation is that the main initial impact will be on sentiment rather than on significant forced selling; according to most of the fixed income managers we have met over recent weeks, government bonds are treated independently in most prospectuses from the ratings requirement on corporate and supranational issues.  This should minimise the number of accounts who are physically unable to hold US treasuries at an AA+ rating.

In the longer term, the risk is that investors demand a higher premium for lending to the less creditworthy US government.  This would entail structurally higher funding costs for governments, companies etc, effectively threatening to act as a further headwind for investors in bond and equity markets.

More positively, we can only hope that Mohamed El-Erian of PIMCO is correct to identify as a silver lining that the downgrade could force US politicians to take the necessary decisions in addressing the country’s financial sustainability and postpone their political posturing.  But of course, the necessary adjustment to prevent a further downgrade implies significant government cutbacks and tax-raising – moves that would threaten the strength of US growth at a time when investors are already extremely concerned about the country’s economic performance.

By Anthony McDonald

To join the conversation on the OBSR blog, please follow this link:

http://www.obsrfundratings.co.uk/Default.aspx?alias=www.obsrfundratings.co.uk/blog

Posted in: Morningstar OBSR Commentary,

As you may have seen in the financial media recently, Morningstar UK has been appointed Sector Monitoring Organisation to IMA.

Following a successful bid, and starting on 1^st October this year, Morningstar UK will be managing the data collection, processing, and reporting of all portfolio holdings for all open-end funds available to investors in the UK that are classified to IMA sectors. This will include considerable data monitoring, collection, and reporting work around fund derivatives holdings, which we believe to be a particularly crucial as the use of derivatives in investment management continues to rise and issues around their transparency grow.

In this regard, we’ll be working with the IMA to develop rules for monitoring funds that are not suited to long-only portfolio monitoring, including the identification of the increasing number of funds using derivatives for investment purposes beyond efficient portfolio management and the development of a recommended disclosure standard for derivatives holdings.

The collection and analysis of portfolio holdings is at the core of who we are and what we do. For the past 10 years, we’ve led the collection and analysis of full fund portfolio holdings across the UK and Europe based on our fundamental belief that investors need transparent and consistent analysis of full portfolio holdings in order to fully understand their investments.  We very much look forward to bringing this expertise to bear in our additional capacity as Sector Monitoring Organisation to the broader industry.

Posted in: IFA News and Commentary, Morningstar,

Morningstar ETF analyst Hortense Bioy recently wrote an article for FTAdviser explaining some of the concerns over synthetically replicating ETFs and how these products aim to deliver returns to investors. Click here for the full article on FTAdviser.

Posted in: Research,

Continuing Morningstar’s partnership with Techlink, here’s what you may have missed over the past couple weeks:

**Treasury Publishes Consultation On Eis And Vct Investment Start-Up**_</p>

SYNOPSIS: The Treasury has published a consultation document on the simplification of the current EIS and VCT schemes, as well as introducing a new scheme to target early-stage investment in small companies
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In the March 2011 Budget the Chancellor made a commitment to consult on the simplification of the EIS and VCT schemes and support for seed investment and start-ups. The Treasury has now released a consultation document.  The aim is to consult on: · Additional support for seed investment via the creation of a new scheme; · Simplification of the current schemes; and ..continued on the Techlink website
**Pension Compensation And Taxation Consequences**
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__SYNOPSIS: The whole issue of compensation relating to pension schemes is, to say the least, somewhat complicated.___

Over the last few months, the tax treatment of compensation payable to pension scheme members has become a hot topic. This follows on from the FSCS compensation paid in respect of Keydata products and the recent Treasury proposal to remove income and capital gains tax reliefs for ‘pension mis-selling’ compensation (see our bulletin dated 7 June 2011. As a result of the increased interest we ..continued on the Techlink website
**Pensioner Tax To Be Simplified**
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__SYNOPSIS: The Treasury have asked the Office of Tax Simplification to review the system of pensioner taxation and make recommendations on how it may be simplified.___

In a letter dated 5 July 2011, David Gauke, Exchequer Secretary to the Treasury, has requested the Office of Tax Simplification (OTS) to provide a review of pensioner taxation.  The OTS is charged with identifying and examining which parts of the tax system that create the most complexity for pensioners and how this varies across the pensioner population. It is then asked to propose ways in ..continued on the Techlink website

Techlink, from Technical Connection, is the smart way for you to:

• Keep up to date

• Have access to a full library of technical information and interpretation on all the key issues surrounding personal and corporate tax, UK and offshore investments, protection, corporate and business markets and trusts

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All of this content is delivered through an extensive and regularly updated range of text based documents, audio visual programmes and podcasts.

Techlink also provides you with copy for quarterly newsletters to send to your clients and professional connections.

Posted in: IFA News and Commentary,

Several credit managers, including the team at TwentyFour Asset Management, have been telling us recently about a particular quirk in the inclusion rules for some of the most widely-used high yield indices.  In essence, they do not include high yield companies if they are headquartered in countries whose debt is rated sub-investment grade.

In practice, this has only a minor impact upon the high yield universe and has historically excluded more speculative emerging market issuance.  It has, however, taken on a new dimension with the downgrades of Greece and Portugal over recent months and the overnight downgrade of Ireland by Moody’s.  While still only a small part of the European credit markets, corporate bonds from these countries could be subject to technical selling from benchmark-oriented strategies if they fall out of the indices.

I should stress that we do not expect a significant longer-term impact on the high yield funds that we rate.  All are inspired by bottom-up credit analysis rather than index composition and are in any case relatively light on peripheral Eurozone holdings.  We must, however, be aware of the potential for price dislocation in some issues that are popular amongst investors, especially in Ireland where many global companies are headquartered.  On the other hand, of course, any such volatility could also create some attractive opportunities for active managers.

Posted in: Morningstar OBSR Commentary,

This video reviews the process by which you can create and manage your own customized performance reports. Show money-weighted or time-weighted returns for any time period you like and save report templates for quick and easy performance reporting. Click here to view the video.

Posted in: Training Videos,

This quick training video shows how to setup batch report templates and schedule their production. This allows you to automatically generate client reports at regular intervals and deliver them via the client web portal. Click here to view the video.

Posted in: Training Videos,