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Morningstar Investment Management Adviser Roadshow

Chris Galloway, CFAManaging Director, Asia PacificInvestment Management group, Morningstar

The Art and Science of Maximising Investor Returns

Morningstar’s investment principles

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We putinvestors first

We’reindependent-minded

We invest forthe long term

We’re valuationdriven investors

We take afundamental approach

We build portfolios holistically

We strive tominimize costs

Drivers of total investor returns

Source: Philip U. Straehl and Roger G. Ibbotson: The Long-Run Drivers of Stock Returns: Total Payouts and the Real Economy, Third Quarter 2017

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“In the short run, the stock market is driven mostly by demand but in the long run, the cash flows that corporations supply are the ultimate drivers of stock returns”- Philip Straehl and Roger Ibbotson

Long term asset class returns Ca

pita

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ns

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Source: Morningstar Investment Management. For Illustrative purposes only. U.S. Large Cap Stock Return 1871-2015

Long-run stock returns are driven by fundamentals

Inflation 2.1%

Total Payout Yield4.9%

Growth 1.6%

Total Return 9% p.a.

2

4

6

8

10

12

14

Cum

ulat

ive

Retu

rns

01880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

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Growth 1.6%


2

4

6

8

10

12

14

Cum

ulat

ive

Retu

rns

01880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Inflation 2.1%

Total Payout Yield4.9%

5




2

4

6

8

10

12

14

Cum

ulat

ive

Retu

rns

01880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

5




2

4

6

8

10

12

14

Cum

ulat

ive

Retu

rns

01880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Fundamental Return 8.8% p.a.

Implementation


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Implementation shortfallCa

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Implementation


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Implementation shortfallCa

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“You can’t control what markets can do, but you can control the costs you pay. The less you pay to the purveyors of investment services, the more there will be for you.”

– Burton Malkiel


Source: Edelen, Roger M. and Evans, Richard B. and Kadlec, Gregory B., Scale Effects in Mutual Fund Performance: The Role of Trading Costs (March 17, 2007)

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Implementation shortfall

0%

50%

100%

150%

200%

250%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

All Large-cap Stocks Mid-cap Stocks Small-cap Stocks

Annu

al T

radi

ng V

olum

e (M

ean)

Per U

nit T

radi

ng C

osts

Per Unit Trading Costs

Commissions (Mean) Spread (Mean) Price Impact (Mean)



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0%

50%

100%

150%

200%

250%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%


Annu

al T

radi

ng V

olum

e (M

ean)

Per U

nit T

radi

ng C

osts

Per Unit Trading Costs

Commissions (Mean) Spread (Mean) Price Impact (Mean) Annual Trading Volume (Mean)



8


0%

50%

100%

150%

200%

250%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%


Annu

al T

radi

ng V

olum

e (M

ean)

Per U

nit T

radi

ng C

osts

Per Unit Trading Costs (with Volume Impact)

Commissions (Mean) Spread (Mean) Price Impact (Mean) Impact of Volume


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Investor behaviour gap

Investor Behaviour

Gap

Implementation


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Investor behaviour gap

Investor Behaviour

Gap

Investor Behaviour

Gap

Implementation


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Investor behaviour gapIn

vest

orRe

turn

s

“Typically, the studies find that the returns investors have earned over time are much lower than the returns of the average investment.”

– Carl Richards, The Behaviour Gap

-$6.00

-$4.00

-$2.00

$0.00

$2.00

$4.00

$6.00

$8.00

$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MIL

LION

S

GROW

TH O

F $1

0,00

0

Net Fund Flows Growth of $10,000 invested

The behaviour gap - investor versus investment returns

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Source: Morningstar Fund Manager Research – 10 Year Wealth versus Fund Cash Flows 2007 to 2017


10


-$6.00

-$4.00

-$2.00

$0.00

$2.00

$4.00

$6.00

$8.00

$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MIL

LION

S

GROW

TH O

F $1

0,00

0


-$6.00

-$4.00

-$2.00

$0.00

$2.00

$4.00

$6.00

$8.00

$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MIL

LION

S

GROW

TH O

F $1

0,00

0



10

10year=


-$6.00

-$4.00

-$2.00

$0.00

$2.00

$4.00

$6.00

$8.00

$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MIL

LION

S

GROW

TH O

F $1

0,00

0



10

10year

2. 6 %

total return

=


-$6.00

-$4.00

-$2.00

$0.00

$2.00

$4.00

$6.00

$8.00

$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MIL

LION

S

GROW

TH O

F $1

0,00

0



10

10year

2. 6 %

-9 .9 5%

total return

average investor return =


Investor Behaviour

Gap

Implementation

Drivers of Total Investor Returns

Sources: (1) David Blanchett and Paul Kaplan, “Alpha, Beta, and Now Gamma,” The Journal of Retirement, Fall 2013.

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The value of financial advice

Investor Behaviour

Gap

Implementation



11

The value of financial adviceCa

pita

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Adviser Gamma

Investor Behaviour

Gap

Implementation



11


pita

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ns

Adviser Gamma Additional value add

Investor Behaviour

Gap

Implementation



11


pita

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Adviser Gamma Additional value add

Adviser Gamma1.60%

Total Wealth Approach (0.45%)

Liability Relative Optimisation

(0.12%)

Product Allocation

(0.33%)

Savings & Withdrawal Guidance(0.70%)

Disclaimer

This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report.

© Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only.

In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included.

Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Distribution Team on 02 9276 4550.

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