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The Morningstar Adviser Team ventured to Wales on June 22^nd to present Morningstar’s software and research capabilities to IFAs in the Cardiff area. We have several clients in and around Cardiff so it was nice to see some familiar faces as well as meet others for the first time. The day gave us a great opportunity to discuss some very timely matters facing advisers, most notably looking at the whole market when considering investment products for clients.

Jackie Beard and Tom Treanor, both of the Morningstar investment trust research team, joined us for a discussion which aimed to explain some of the key components of  investment trusts and how they can be used in a client portfolio when the full market needs to be considered.

We found the reception from IFAs to be a little guarded – mainly based on past scandals involving investment trust dealing – but we also found our audience could benefit from an independent analysis of these types of investments.

We realise the industry is crying out for better information, better analysis and more insight so we’re very excited to be expanding our qualitative research capabilities to cover investment trusts and ETFs.

If you have a need for this kind of analysis or if you have any feedback for us, please let us know. The slides from the Jackie and Tom’s presentation are available by clicking here.

The Adviser Workstation portion of the day consisted of one-on-one training sessions and an overview of the system’s capabilities with a focus on importing client portfolios and investment planning.

It was great to see some of our oldest clients learning new features of the system and taking useful bits of information back to their offices.

We also saw an increased need for client reporting tools and a process to produce consistent output on a regular basis. I will be focussing on these types of things in future training classes so please feel free to provide any feedback or requests in the comments section below.

Our development team is hard at work this summer preparing for the next software release in early September.

We have some great new features planned that are sure to make your day-to-day operations run even smoother. Stay tuned for more about these additional features.

Posted in: Events, IFA News and Commentary,

When it’s actually an equities fund.

This may seem rather obvious; however, it does address a common misconception that we at Morningstar have come across when discussing our approach to fund research with IFAs.

As many advisers have begun to add commodities exposure to their clients’ portfolios, a number have turned to the BlackRock Gold and General fund to provide the commodities piece of their asset allocation puzzle. The only problem is it’s not invested in commodities – it’s certainly not a gold fund – it’s not even a precious metals fund – and this is where the misconception lies.

An analysis of the complete holdings of the BlackRock Gold and General fund shows a portfolio full of shares in mining operations and companies whose business is the procurement of precious metals and natural resources.

No where in the holdings will you find actual gold bullion, silver bars, or sacks of diamonds. You won’t even find derivatives of these physical assets which artificially replicate the market prices of commodities.

The fund’s own objective even states an aim “to achieve long-term capital growth by investing in gold, mining and precious metal related shares.” The key here being “related shares.”

Commodities and equities are two different asset classes. They perform differently in various market conditions and they are subject to their own unique risks. And we at Morningstar think this is a critical piece of information for IFAs and investors.

So why the misconception? Why do some IFAs and investors consider this fund a play on physical commodities when it is actually an equities fund.

Surely, nobody is arguing with the fund’s impressive returns to investors – Morningstar included. Our analysts have given this fund an “Elite” rating, and looking at the Morningstar Qualitative Report for the BlackRock Gold and General Fund, there is plenty for investors to like.

In response to a client query, I recently discussed this report with Jackie Beard, now Morningstar’s Director of Investment Trust Research, and author of the report.

She noted several references to the fund’s rigorous approach to company analysis, the importance of good management at those companies and the type of companies in which the fund invests. She also added the fact that the fund even falls within the “Equity Sector Precious Metals” Morningstar Category for open-end funds.

But many IFAs see this as “a gold fund” or a way of diversifying a client’s portfolio with commodities. I have had several conversations with our Adviser Workstation clients who question our analysis of this fund and expect to see it as the commodities component in a portfolio.

Along the same line, I have also had this conversation about property funds and the difference between a fund that owns actual property and a fund that invests in the shares of real estate companies.

Both types of investments – owning physical assets and owning shares in the companies with exposure to those assets – have their own merit in a portfolio, but it’s important for investors to understand the difference.

Jackie’s comments were in response to an IFA who wanted some clarification of Morningstar’s classification of this fund as equities rather than commodities. She went to considerable length to provide a comprehensive answer to this question because it illustrates such a common misconception and is at the core of Morningstar’s value proposition to IFAs in terms of fund research.

Jackie also reached out to Malcolm Smith, Product Specialist for the BlackRock Gold and General Fund, to get BlackRock’s take on the question of commodities vs. equities and where their fund sits.

Mr. Smith, who was kind enough to provide a very prompt response, had this to say: “You have to remember it’s a gold equities fund with exposure to gold. We believe in the superior fundamentals that equities will outperform the gold price. Morningstar is right to have it in the equities category as that’s precisely what it holds.”

We relish these kinds of questions because it shows our clients are digging deeper and trying to fully understand the investments they recommend.

It illustrates the need for transparency and how access to quality data and analysis helps advisers make better investing decisions. Morningstar has grown on this principle and we feel there is much we can do in the UK to foster better understanding and further the interests of investors.

We always welcome a healthy debate and I look forward to similar conversations with our clients in the future.

Posted in: Morningstar, Research,

While David Cameron and Nick Clegg ironed out the details of their coalition government, Morningstar held its annual investment conference across the Thames from the Houses of Parliament at the Park Plaza Riverbank Hotel. This year marked the 4th annual conference and we again welcomed several thought provoking presenters and healthy debate from delegates. Morningstar’s own Holly Cook (from morningstar.co.uk fame) took the liberty of blogging throughout each of the presentations. If you were able to attend, I hope the event was informative and stimulating. If you weren’t able to attend and you would like to see what all the buzz is about, please see Holly’s posts for day 1 and day 2 of the conference below:

Day 1 and  Day 2.

Next year’s conference is likely to be the same time of year so please contact Morningstar if you would like to attend. Further details of next year’s conference should be available later in 2010.

Posted in: Events, Morningstar,

Last week the Adviser Workstation team travelled to York for our monthly Adviser User Forum. It was great to finally meet some of the people we have been speaking with on the phone for the last year or so! We also managed to see some of the sites, including The Shambles, “the most picturesque street in the UK,” and I even bought a flat cap so I could fit in.

The agenda included a presentation of common investor mistakes and how to avoid them, given by one Morningstar Associates’ investment consultants Brook Sweeney, a presentation of Morningstar’s qualitative fund research given by Head of UK Research Jackie Beard, and an overview of the Adviser Workstation software given by yours truly. Overall the feedback we received was quite positive and it was great to see more of our clients engaged with the software and interested in the research and fund analysis Morningstar provides the IFA community. The individual training sessions in the afternoon were also well received. It is always nice to sit down with our clients and help them address their day-to-day business needs.

Common training questions included questions on importing client portfolios, portfolio reporting needs, investment planning and future integrations with 3^rd parties. If you have questions in any of these areas, please let us know! These are very common needs of our clients and we are very happy to help you start utilizing the software to meet your business needs. Some of the training videos on this blog may also help address some of these needs so I would encourage you to have a look.

If you have not had the chance to attend one of our User Forums we would love to see at the next event in your area. Stay tuned for future emails announcing locations and dates. In the mean time, thanks for reading!

Posted in: Events, Morningstar,

In January, Morningstar Adviser Workstation was awarded the Best IFA Online Tool by Professional Adviser magazine. We were thrilled to win this award, especially considering the other nominees which included Inteliflo, Adviser Office and Trustnet. This was a great start to 2010 and a real testament to our efforts in 2009 to improve the tool and increase awareness of Morningstar in the IFA community. We are really looking forward to building on this success in 2010 as we increase our efforts to integrate with various wraps and back office systems and continue to make Adviser Workstation an indispensible tool for IFAs.

Posted in: IFA News and Commentary, Morningstar,

Back in January I attended a conference here in London that went pretty far in breaking the mould of a traditional gathering of IFAs. The conference was held by IFA Life, which is a social networking site for IFAs. There were industry experts there to speak but the topic of conversation did not center on product providers, investing trends or the overall ill health of the economy. Instead, as the title of the conference stated, we were there to hear about “Social Media in Financial Services” – a topic that is near and dear to very few IFAs. So why the great turnout? I braved the snow and ice because I want to make this blog as informative and valuable as possible and I thought it would be a good opportunity to hear what others are doing and test out some of my ideas with advisers. But why did so many advisers turn up in spite of a snowstorm the morning of the first day? Why were they saying afterwards, “this is the best conference I have ever attended”?

It turns out that social media and the internet present an enormous opportunity for financial advisers to reach out to potential clients and improve the service they already provide. Now there is a little sarcasm in that statement – of course the internet can help an adviser reach out to clients. Many advice firms have websites of varying complexity and have found them to be much like a phone number was 25 years ago; something that is essential for doing business. However, social media – things like Facebook, Twitter, Linked In, Ecademy and even Youtube – can actually be utilized to effectively communicate with clients and prospects while building a name for oneself in the online community. I’m sure most IFAs will read this and think, “Facebook is for kids,” or “What’s a Twitter?” I would have put myself in that category before this conference and I’ve used Facebook for about a year so I wouldn’t say I’m uninformed. What I realized at the conference though, and I know I wasn’t alone, was that internet usage across every age group in the UK is increasing. As it increases, the percentage of people using social networking sites is growing even faster, and that includes people over the age of 55. I realized that although things like Facebook, Twitter and Youtube are seen as novelties by many, they are very close to becoming mainstream. And once they are mainstream, if you are not already familiar with their uses and how to leverage these things, you have to play catch-up.

Most IFAs do not have a marketing plan. This was another somewhat surprising statement uttered at this conference. Do you have a marketing plan? Other than referrals, how else does your client base grow? Is your current business plan ready to take advantage of the shrinking number of IFAs and the inevitable consolidation that will take place? Facebook or Twitter are certainly not perfect solutions, but the ability to understand who uses these types of social networking sites and why they use them can place an adviser in a very good position as things evolve in the coming 3 years. These are merely my observations and by no means an attempt to lecture so please add your own comments or feedback, whether you agree or disagree.

Posted in: IFA News and Commentary, Morningstar,

A successful IFA firm today looks quite different than a successful firm 10 years ago and I would bet the benchmark for success will move again in the next couple years. Based on a number of conversations I’ve had with IFAs over the past few months, two major factors in determining a firm’s success will be the ability to provide truly independent advice and the firm’s ability to leverage technology solutions to their advantage. With proposed changes on the horizon, regardless of the final form they take, it is clear that many IFAs will cease to exist, which should leave quite an opportunity for IFAs who are able to adapt.

So what makes an an adviser independent? The FSA says this is someone who provides comprehensive and fair analysis of the relevant market. They also say commissions will be banned in favor of a fee based charging structure to be determined by the IFA. So is your firm in a position to provide independent advice? Do you have the necessary tools and processes in place? One thing many advisers are realizing is that they will have to change the way they work in order to call themselves independent. This might include researching the whole market; considering ETFs, investment trusts or hedge funds, or turning to an independent data provider for research. If predictions hold true and many IFAs cease to provide advice in the post RDR world, the independent adviser will be in a good position to take on new clients and charge a premium for their service. The banks will certainly be major players in the scramble for new business, however, if I’m a prospective client looking for advice, an independent adviser with a quality service proposition looks a lot better to me than a banker.

The other half of the puzzle then is having a process in place that will minimize the administrative requirements of an IFA firm and allow for an increase in the number of clients without a drop in quality of service. To some this will inevitably just mean longer hours, but for others this will involve the integration of smarter business practices and the use of technology. Whether it’s a back office system that allows for easier reporting, a research tool that instills a consistent process or a planning tool that is effective with clients and easy to use, software and websites will play a major role. Technology platforms also provide a framework for multiple people ensuring a level of consistency throughout the business – most important if the person preparing the reports is not familiar with the client. Process is another popular word with regulators and an effective technology package will provide a process for one IFA, a small office or a large network.

The Adviser Workstation can be a big step in the right direction if embracing technology interests you. If you already use Morningstar for research, reporting or investment planning, hopefully it has made your business run smoother and added value. Whole of market investment data, research and reports give you the support you need for picking investments. Integration with various platforms and back office systems gives you quick access to Morningstar portfolio analysis and performance reporting. And the investment plan provides an easy-to-use process for assessing risk and determining asset allocation. This suite of tools is designed to make your advice more effective and more efficient so when opportunities come along you can respond with the highest standard of service.

I think independence and technology go hand-in-hand because they can compliment each other and without one, the other isn’t worth much. I fail to see how technology that only points advisers at selected products has anything to do with an investor’s best interests. And an independent adviser that does not embrace technology will struggle to keep up with the standards of service set by his peers and mandated by the FSA. If you disagree, please share your thoughts. And if you agree, please feel free to add your comments or observations as well. Thanks for reading.

Posted in: IFA News and Commentary,

At the center of many discussion I’ve had with IFAs over the past few months are the changes to the investment advice business and how these changes are affecting them and the IFA community as a whole. The Retail Distribution Review is of course still looming somewhere on the horizon, however, the Treating Customers Fairly initiative is well under way and a source of change already. I supposed it seems quite an obvious concept – to treat customers fairly – and certainly as an American coming to the UK a year ago, this was a bit of a strange one for me. Why is an initiative needed? How are customers treated unfairly? But I can see now that for a small business owner, it can be  quite a challenge to put in place a process that levels the playing field and ensures each client’s interests are considered – especially when it doesn’t seem to make business sense.

This is obviously a touchy issue, but it’s an issue that is at the forefront of many firms value proposition. What types of changes have you and your business undertaken in the last 18 months? Good or bad, these changes have raised other issues in turn: are the resources available to both treat customers fairly and operate a profitable business? Is the industry changing along with requirements of advisers? What resources would improve your ability to provide a valuable service to your clients?

The consensus among Morningstar’s IFA clients is that TCF is a good thing that will lead to a higher quality of service, but the industry has to catch up in some areas in order to make this easier for advisers to implement. The lack of independence is a glaring issue. Many platforms do not offer an appropriate range of products for all clients or access to the full market. Fee structures are not as transparent as they should be and the end investor often suffers from this. And the information available for many financial products is not easily obtained or even obtainable. (With Profits products to be discussed in a future posting!)

I also get the feeling that TCF is old enough to have made some effects on the industry but young enough that IFAs still feel targeted by regulation and unsure of what is expected in a changing environment. What does an FSA visit consist of? What are they looking for? How is the business considered in each case? We hope to sit down with the FSA in the very near future to discuss these issues and hopefully start a constructive dialogue about advice process and best practices. More to come on this in the future…

Working for Morningstar, It is my goal to be part of the solution to the lack of resources in the marketplace and to hopefully start leveling the playing field for both the end investor as well as advisers. The end investor is always at the core of what we do, but it’s the advisers and intermediaries that need the high quality tools and data to provide a quality service to the end investor. And interestingly, it is also high quality tools that are starting to contribute to the profitability of an advice firm. The Adviser Workstation has helped several advisers streamline their advice process while providing a higher quality, more consistent service. The regulatory folks seem to like what Morningstar has to offer as well – they were very impressed with one IFA’s Adviser Workstation reports during a recent visit.

So are you happy with the way your advice process addresses TCF? Are you happy that TCF is part of being an financial adviser? If you’re not, are some of the reasons addressed above? The next 18 months should be interesting as businesses, platforms, software and regulators all evolve in the advice industry. How will you evolve and how will the service you provide improve the lives of your clients? We see a huge opportunity to help and I’m very excited to play a part.

Posted in: IFA News and Commentary,

There is currently an increasing level of concern about the macroeconomic outlook, which is rational given that the punch bowl will eventually be withdrawn. The biggest danger now is that fiscal and monetary authorities undermine their own credibilty by morphing the case for “extreme and exceptional measures” introduced to control a banking crisis into a vain attempt to control the economic cycle. If this is attempted it is doomed to failure. The natural order of weak to strong hands will continue regardless and any indecision will result in a repricing of the long bond and a very rapid end to the recovery. To meet a pile of debt with more debt will result in an overall increase in the cost of that debt which is the economics of the madhouse.

The process of deleveraging will continue – it is part of the process of taking money from the weak (leveraged buyers of commercial property) to the strong (cash rich property investors); the transaction liquidates credit but does not destroy the asset value.

In aggregate, equities as measured by either price to book price to sales or price to earnings are not expensive but we face the reverse of the situation at the start of the previous decade with emerging markets priced for earnings growth to continue on a secular basis and developed markets cheap in relation to expectations. Given the likely new era of thrift that the western world faces, the valuation may well reflect reality.  However, in both cases more volatility is guaranteed as further rerating of the P as opposed to the E in the PE multiple is unlikely given the relative macroeconomic noise of the next 12 months. The best relative opportunity is in a combination of stodge – the best relative value and the likes of technology – beneficiaries of even a vague pick up in corporate capex from a 30 year low.

In this context, equity fund managers are progressively taking risk off the table from emerging through to developed markets. All share a common objective to find the strong balance sheet, the strong free cashflow, the beneficiaries of the flight to thrift or the consolidator. Small caps must be niche or thriving, large caps stable and profitable. It may be wise to retain the bias to managers that stress dividends or market dominance.

The bubble echo of commodities continues with the “China going it alone” theme supporting the story. The current story looks very shaky with inventories piling higher and commodity stocks (ex oil) moving to expensive levels. The fact that on a price to sales basis many of the pure, as opposed to diversified, mining stocks have returned to July 2007 levels says much about the current price of the category.   The energy complex is least exposed to the accusation that it is expensive.

Credit is looking increasingly tired – it’s an income story now.  Parts of investment grade are plain expensive. The higher yield space should balance an attractive yield against further corporate distress.

The biggest threat remains a serious and sustained move higher in sovereign bond yields globally, which is dismissed by the deflationists but shows a lack of understanding about the supply dynamics. The best possible outcome would be politicians at least giving the appearance of caring about the deficit while the monetary authorities adopt a soft exit to Quantitative Easing – probably by suspending their own purchases by guaranteeing low interest rates to let the banks ride the yield curve.

We still suspect risk markets can make progress over the year but that volatility will be a constant feature.

By Peter Toogood

Posted in: IFA News and Commentary, Morningstar OBSR Commentary,