Speaking in Sydney yesterday, Morningstar director of manager research Tim Murphy said an increasing focus on client outcomes has, since 2012, seen a “proliferation” of objectives-based funds in the Australian market.
Total funds under management for the sector have reached $10 billion, with positive inflows each quarter since 2010 (notwithstanding one exception in late 2013), according to Morningstar data.
Mr Murphy has released a new paper on the sector which analyses 44 funds, focusing on 10 that have similar returns objectives of CPI plus 4.5 to 5.5 per cent.
Of the 10 funds analysed, there is a wide range of asset allocation settings despite their similar objectives, he said. For example, the allocation to international shares ranges from 11.1 per cent to 67 per cent, while the allocation to cash ranges from 1.8 per cent in one fund to 37.3 per cent at another.
“They have very little in common other than the objective. The range of assets invested in there is going to lead to different incomes,” Mr Murphy said.
“While the objective makes sense and is in line with the client’s goals and what they want to achieve, all sorts of different things are going on there [under the hood],” he said.
When it comes to returns, the 10 funds analysed have achieved close to their stated objective when it comes to three-year and five-year periods, according to Mr Murphy.
But it is a different story over the past year, with almost all of the funds posting a negative one-year return.
“We don’t judge any investment approach on any given one-year period,” he said, “but it’s interesting for us that in this newer subsection of funds, in its first challenging market environment, only a couple kept their head above water.
“The first hiccup in markets has brought into question what some of these guys are doing,” he said.
Mr Murphy noted that the fund managers in question would point out they are aiming for CPI plus 5.0 per cent over rolling three- or five-year periods, not over a given one-year period.
But given the strength of equity and bond markets since 2009, it would have been difficult not to have hit the objectives, he said.
Furthermore, when compared to the risk/return of Vanguard’s low-cost Balanced Fund index product over the past three years, not one objectives-based product has delivered a better return at a lower risk.
“Is this a better way of approaching portfolio construction in terms of the outcomes being delivered for clients? It’s early days – the jury’s still out,” Mr Murphy said.
Many of the investors Morningstar talks to are “sitting on the sidelines” and actively managing the objectives-based sector rather than heavily allocating to it, he added.
“No one has gone heavy yet. $10 billion in the scheme of our industry is still a drop in the ocean. It’s still pretty early days,” he said.
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