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Terry Smith is a well-known personality in the finance industry, having headed up a number of FTSE companies, including Tullet Prebon (TLPR), for which he is currently the CEO. He is an original thinker and has often demonstrated his willingness to bet against the crowd. In November 2010 he launched the 

FundSmith Equity fund, rated Bronze by Morningstar OBSR analysts, which seeks to invest in high quality businesses whose assets are intangible and difficult to replicate, thereby compounding in value over the years. These stocks are often referred to as high quality businesses and are most commonly found in some of the more defensive sectors. Understandably, many of these companies have performed well in recent years in both relative and absolute terms and investors have preferred the safety and predictability of their earnings streams. The question that has consequently often been asked, is whether or not they remain attractive from a valuation stand-point?

Smith considers “value” in a number of different ways, one of which is to compare the companies’ Free Cash Flow (FCF) yield with the normalised yield over time on the long bond. If Smith & Co. can purchase stocks that have a FCF yield equal to or greater than the long bond yield, and that have free cash flows that can grow over time, he believes they  are getting good value—certainly relative to the so-called ‘risk-free rate’ and possibly even in absolute terms.

Using these metrics, Smith argues that the companies in their portfolio are higher quality than the market, based on their return on capital, and have FCF and dividend yields in excess of the market and the long bond. He also strongly believes that these cash flows and dividends will continue to grow. We look forward to hearing his thoughts on why it remains appropriate to continue investing in a portfolio of so-called ‘boring’ companies and what likely outcome investors may anticipate.

Terry Smith will be one of many UK investment luminaries speaking at the Morningstar Investment Conference in London this May. See the Morningstar corporate site for more information.

Posted in: Events, IFA News and Commentary, Morningstar, Research,

Beginning this year, providers of index-tracking UCITS will be required by European regulation to disclose predictions of their funds’ tracking error and tracking difference. Providers will also have to explain any divergence between their predictions and the funds’ actual performance.

Morningstar’s research report, On the Right Track: Measuring Tracking Efficiency in ETFs, examines the factors that influence tracking error and tracking difference in exchange-traded funds (ETFs), and applies those metrics to a selection of 65 ETFs linked to eight popular equity indices.

The key findings of the Morningstar report are:

Hortense Bioy, director of European passive fund research for Morningstar, said:

“Tracking error and tracking difference both play a part as complementary measures for assessing the replication quality of an ETF. As ETFs continue to gain in popularity, there is an increasing need for investors to be clear about these most commonly used metrics. In particular, there seems to be considerable confusion around tracking error, its meaning, key drivers, and calculation. Beyond the definition provided last year by ESMA in its final guidelines on ETFs and other UCITS, we believe that investors would benefit from a harmonised approach to calculating tracking error. Our report intends to open up this discussion.”

For a copy of the full research report, please click here.

Authors

Ben Johnson, Director, Global Passive Fund Research

Hortense Bioy, CFA, Director, European Passive Fund Research

Alastair Kellett, CFA, CAIA, International ETF Analyst

Lee Davidson, ETF Analyst

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

We’ve just announced the agenda for this year’s UK Morningstar Investment Conference, May 14-15, which you can view here: http://bit.ly/MICUK2013 

Registration is also now open: http://bit.ly/MICUKinfo

We look forward to seeing you there!

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

Emma Napier of Platforum discusses how IFAs will conduct due diligence when selecting a platform following the Retail Distribution Review:  Platforum video on platform due diligence

Posted in: IFA News and Commentary,

This week we ran the second of our Adviser Forums where we were joined by the FSA who outlined what is expected from advisers post RDR.   We had a great turn out at both events, with 60 advisers joining us in Edinburgh and 62 in London. Colin Wilcox of the FSA outlined the requirements of professional standards, and talked about the scope of service advisers would provide.  When the advisers in the room were asked if they were likely to go Restricted or Independent, the majority at both events stated Independent – this is very different to what the press is telling us.  There was discussion on how independents would provide a fair and comprehensive analysis of the market and having just seen the capabilities of Adviser Workstation, the FSA said that with tools like AWS and others like it, it was very clear that this type of analysis is achievable.  The FSA highlighted that there is not an issue with the implementation of a Central Investment Proposition, as long as the advice given was suitable for the client.  It seems to me that using models works really well as long as you are also in a position to research alternatives if the models are not suitable for the client.

The FSA talked about their expectations for Adviser Practices to have client centric propositions that work for your individual businesses and the importance of having the right controls in place to deliver that proposition.  From the Q/A session that took place after the presentation, it’s crucial for advisers to have systems in place that can back up their proposition and help action and review the advice given.  One of the questions came from an adviser who asked how much depth is required in terms of analysis, and he wanted to know if it was necessary to understand the underlying holdings funds are invested in – the answer was yes.  This is the type of analysis where AWS can provide you with the answer in seconds.  My view is that technology will assist advisers in putting those business controls in place and providing the all important audit trail on  how decisions have been made and ensuring that the recommended investments continue to be suitable for the  client.

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

Next year, the 7th annual Morningstar Investment Conference will take place on the 14 and 15 May 2013 at the Park Plaza Riverbank Hotel in London.

At next year’s event you can expect to see an agenda focused around educational insight covering a broad range of investment-based topics.

For a look at the 2012 event, please click here

To register your interest and to receive updates, please complete a short form

Or visit our website

Posted in: Events, IFA News and Commentary, Marketing, Morningstar,

On 11 January we launched the first Morningstar Analyst Ratings for Closed-end Funds. Our coverage now comprises around 70 funds and still growing. At Morningstar we believe wholeheartedly in the investment trust structure and think these funds have much to offer their shareholders.

There was much to do behind the scenes to enable us to give qualitative ratings to investment trusts. We recognise the need for advisers to be able to compare all funds on a like-for-like—and vehicle-agnostic—basis. While this sounds fairly straightforward, the reality is that it’s a little more complex to get the right information.

We have been working hard to get investment trusts to provide their full holdings on a full and frequent basis—something they haven’t had to do before. We’ve then been able to categorise them according to our Morningstar categories, which are holdings-based, to enable that true peer comparison.

With the funds classified under our proprietary categorisation system, we could then enhance the value of our Morningstar Rating by calculating it using an investment trust’s NAV rather than share price. One of the aims of the Morningstar Rating is to enable a comparison of manager skill, rather than performance that’s beyond his or her control. By classifying investment trusts into our Morningstar categories, you can now see the full peer group of like-minded funds and make more meaningful comparisons.

With full holdings data now available on a regular and frequent basis on many funds, we’ve been able to undertake detailed analysis of those funds and start to issue ratings and reports. The funds we’ve covered so far have been some of the largest by fund size, and also the most familiar or prominent names, but crucially it’s also been where we have good transparency and access to the fund managers. That said, we want to make our coverage meaningful and research those funds on which you want our opinion so there are others on our radar where we’re still working on getting that data and access.

So far we’ve covered funds across a range of sectors, and at this stage we’re focused on the more traditional, equity funds – so global equity, UK, European, emerging markets, Asia and also some of the sector funds.

Transparency is still a challenge, although we’re delighted with the response we’ve had to our paper that we released in May: ‘Investment Trusts: Why Transparency Matters.’ In this paper, we wanted to demonstrate why it’s so important for investment trusts to disclose full holdings and on a frequent basis. Investors and their advisers need to have timely information to be able to fully understand risks to which they are exposed. The response has been overwhelmingly positive—not just from those funds on which we weren’t getting data, but we’ve also seen an increase in frequency from others where we were getting the holdings on an annual or semi-annual basis and this has now moved to quarterly or even monthly.

It’s not just the asset managers that have responded positively, it’s the funds’ boards of directors too. Like us, they see the RDR as an opportunity to bring their funds a little more onto the radar than has been the case in the past. To that extent, more and more they’re looking beyond just their AIC sector peers for comparison purposes when reporting to shareholders and we’re encouraged to see their interest in our use of the Morningstar categories.

The biggest challenge is, still, access.  We want to see investment trusts as a feature on the major fund platforms to encourage their wider use. It’s not an impossible task: Alliance Trust Savings has been offering them on their online platform for years.

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

The AIC will be hosting a number of training seminars on closed-end funds over the next three months around the UK. The agenda for the seminars will include how to research investment companies – 10 key issues to consider, an analyst/manager’s overview of the investment company sector and the current opportunities, a platform update and a Q&A panel. Speakers will include: Jacqueline Lockie, the AIC’s Training Manager, Annabel Brodie-Smith, the AIC’s Communications Director, investment company analysts/managers, platform representatives. CPD points are available for these sessions from the CII, CISI and IFP and advisers need to individually highlight what gaps the training fulfils.

For more information, visit: http://www.theaic.co.uk/Adviser-Centre/AIC-adviser-training-seminars/

Upcoming events:

Exeter
Thursday 13 September 2012 9.30am – 12.30pm
View event details

Bristol
Friday 14 September 2012 9.30am – 12.30pm
View event details

Leeds
Thursday 27 September 2012 9.30am – 12.30pm
View event details

Manchester
Friday 28 September 2012 9.30am – 12.30pm
View event details

Brighton
Thursday 1 November 2012 9.30am – 12.30pm
View event details

Southampton
** Friday 2 November 2012 **9.30am – 12.30pm
View event details

Glasgow
Thursday 15 November 2012 9.30am – 12.30pm
View event details

Edinburgh
Friday 16 November 2012 9.30am – 12.30pm
View event details

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

We’re pleased to announce Morningstar has been nominated for the 2012 Aberdeen Platform Awards as the leading independent planning tool provider.

If you’re happy with the service Morningstar provides, please vote for us: The Aberdeen Platform Awards

Morningstar was nominated in the category of Leading Independent Tool Provider, which is for the independent toolset available to advisers that they most value to support their proposition. It may be an end-to-end solution or a tool for one or more link in with the advice chain.

Posted in: Events, IFA News and Commentary, Morningstar, Research,

In addition to our user forums, we’re going to start hosting monthly drop-in sessions in our London office. Please stop by to ask questions, receive Adviser Workstation training and chat with other advisers who use AWS.

The first one will be Thursday, 16th August from 10am-1pm

Our offices are located at:

1 Oliver’s Yard

55-71 City Road

EC1Y 1HQ London

By Tube: Take the Northern Line to Old Street, then take exit 4 south on City Road. We’re on the left side after Pret A Manger.

No need to register, just drop-in when you can

Posted in: Morningstar,