Governance & Stewardship
1. Organisational and Investment Approach
Provide a description of the distinguishing features of Morningstar Investment Management and how these features are directed towards achieving client objectives.
Morningstar Investment Management is a global leader in asset allocation, investment research and portfolio construction. Our business combines these core capabilities with Morningstar’s unique combination of investment data, qualitative and quantitative equity and manager research, and award-winning investment advisory capabilities to build cost effective and holistic solutions for our clients – helping them reach their financial goals.
Our heritage, ownership structure, and principle-driven investment approach give us a unique behavioural advantage in achieving client investment objectives. This behavioural advantage emanates from our ability to behave differently when it matters and make rational, long-term decisions in a less-than-rational and peer-driven world to the benefit of investors. We have codified this thinking in our seven investment principles which guide our daily decision-making processes. We put investors first; we’re independent-minded; we invest for the long term; we’re valuation-driven investors; we take a fundamental approach; we strive to minimise costs; and we build portfolios holistically.
We are a global investment group comprised of experienced researchers, investment analysts and portfolio managers. Our investment group span the globe, with primary offices in Chicago, London, and Sydney. We manage money globally, with our entire global team’s insights feeding into our global, regional, and country specific investment ideas. Global best practice groups set our investing best-practices, while local teams, led by regional chief investment officers, tailor investment decisions to local-market requirements and lead engagements with clients.
Provide an explanation of how Morningstar Investment Management aligns its purpose and values with its duty to clients.
Morningstar’s mission centres on helping investors reach their financial goals. Our firmwide investment principles, which drive our investment decision-making, also aligns our purpose and values with our duty to clients. These seven investment principles guide our thinking, behavior and decision-making and have been inspired by the most experienced and successful investors in the last century. These principles are: that guide. These principles have been:
We believe the firms that put investors first win in the long term because their investors win. Since 1984, Morningstar, Inc. has been helping investors reach their financial goals. Our fiduciary duty to our investors is paramount.
To deliver results, we think it’s necessary to invest with conviction, even when it means standing apart from the crowd. Our research shows that making decisions based on fundamental analysis, rather than short-term factors and sentiment, delivers better long-term investment results.
Taking a patient, long-term view helps to ride out the market’s ups and downs and take advantage of opportunities when they arise. Investing with a multi-decade horizon aligns with investors’ focus on increasing their purchasing power over their lifetimes. The long term is the only period where fundamental, valuation-driven investing works.
Anchoring decisions to an investment’s fair value, or what it’s really worth, leads to greater potential for returns. Valuation-driven investing through a long-term focus on the difference between price and intrinsic value enables investors to get more value than they’re paying for.
Powerful research is behind each portfolio position we hold, and we understand what drives the cash flows of every investment we analyse. Fundamental investing incorporates a focus on the future earnings of an investment and not just its prospective price change.
Controlling costs helps investors build wealth by keeping more of what they earn. Investment returns are uncertain, but costs are not.
To help manage risk and deliver better returns, truly diversified portfolios combine investments with different underlying drivers. Portfolios should be more than the sum of their parts. True diversification can have a powerful impact on a portfolio’s risk-adjusted returns—but simply holding more investments isn’t the same as true diversification.
Provide an overview of Morningstar’s ownership, management and governance structures.
Morningstar Investment Management Australia Limited, is ultimately wholly owned by Morningstar, Inc. Morningstar, Inc. is a publicly quoted company (NASDAQ:MORN). Founder Joe Mansueto owns about 57% (as at 31 December 2017) of the company, and the remainder is held by staff, institutions, and private investors.
Ownership of Morningstar, Inc.’s subsidiaries is disclosed in the 10-K filing, available at https://shareholders.morningstar.com/investor-relations/financials/sec-filings/default.aspx.
Management of Morningstar Inc. is the responsibility of its executive officers under the direction of the CEO. Morningstar’s Investment Management group is led by our President and global CIO with the support of local senior management and investment professionals in our regional centres.
Morningstar Investment Management’s Australian governance committees are outlined below:
The Board is responsible for:
The Risk Management Committee is responsible for:
The Compliance Committee is a statutory committee required by the Corporations Act and is responsible for:
The Due Diligence Committee is responsible for:
The Asia-Pacific Investment Policy Committee is responsible for:
Provide an overview of the key management and investment personnel within Morningstar Investment Management Australia Limited.
Morningstar Investment Management Australia Limited is led by the following senior management and investment professionals:
Explain how Morningstar Investment Management ensures client assets are managed in accordance with their investment strategies and how conflicts of interest are managed.
The Asia Pacific Investment Policy Committee oversees the delivery of investment management and investment advisory services to clients in the Asia Pacific region. The Committee’s primary purpose is to have oversight of all policies, procedures and decision-making required to efficiently execute investment management and investment advisory services, ensuring client assets are managed in accordance with approved investment objectives and guidelines. The Committee is also responsible for resolving any conflicts of interest arising from investment management activities in accordance with our conflicts of interest policy.
The Committee delegates authority for certain investment oversight activities to various sub-committees: the Asset Allocation Sub-Committee, the Portfolio Construction Sub-Committee, and the Manager & Security Selection Sub-Committee.
Asset Allocation Sub-Committee is responsible for:
- Recommending Investment Guidelines for portfolios, including amongst other things investment objectives, authorised assets, asset allocation ranges and acceptable portfolio risk levels;
- Recommending Strategic Asset Allocation weighted benchmarks as necessary
- Review of valuation-implied returns for all asset classes; and
- Assumptions, methodology reviews, and recommended changes pertaining to the valuation driven asset allocation forward looking return and risk forecasts.
Portfolio Construction Sub-Committee is responsible for:
- Monitoring and approving asset allocation changes for portfolios;
- Monitoring and approving security selection changes within direct equity portfolios;
- Approving manager appointments (from buy list) and terminations;
- Consideration of fundamental research analysis leading to potential changes in portfolios positioning;
- Monitoring of historic changes in investment positioning and attribution (contribution) to investment performance relative to investment objectives; and
- Monitoring of compliance with the Investment Guidelines.
Manager & Security Selection Sub-Committee is responsible for:
- Recommending Investment Guidelines for internally managed direct equity strategies;
- Approving changes to the investable universe of securities used within direct equity portfolios;
- Approving all manager buy lists and rating changes for each asset class; and
- Monitoring performance of single managers in multi-manager portfolios.
Any perceived, actual or potential conflicts of interest would be addressed in accordance with our conflicts of interest policy.
2. Internal Governance
Provide a clear description of Morningstar Investment Management’s approach to the below key aspects of internal governance and management of business activities which could impact client assets:
All employees are expected to subscribe to the highest standards of ethical and professional conduct. Employees must fulfill their duties with honesty and in good faith, placing the interests of clients ahead of their own. These expectations are detailed in our Code of Ethics which is expected to be complied with, both in word and in spirit. There are also two of Morningstar’s stated core values: “Investors First” and “Uncompromising Ethics.”
Our Code of Ethics contains important provisions dealing with conflicts of interest, insider trading and trading in Morningstar shares, and applies to all Morningstar employees globally. The pertinent provisions of this Code of Ethics also apply to members of Morningstar’s board of directors and to Morningstar’s temporary workers, interns, independent contractors, and consultants in connection with their work for Morningstar.
We expect all Morningstar employees to incorporate ethics into their daily work. All employees are required to read the Code of Ethics carefully and attest they have complied with it annually.
In addition to Morningstar’s global policies, Morningstar Investment Management adopts a personal trading policy that applies to its employees in Australia. A number of obligations are set out in the policy, including the following requirements:
Not to trade in ‘restricted list securities’ during portfolio rebalance periods
Not to derive any advantage personally from information that is not generally available and obtained during the course of employment
Not to engage in front running or scalping
To ensure no conflicts of interest are created with Morningstar Investment Management or any client
To obtain pre-approval for participation in an initial public offering
Ensure that personal trading does not contravene any legal requirements including laws concerning insider trading, price manipulation, false trading, market rigging and short selling.
The personal trading policies require employees to provide holdings reports, transactions reports, annual reports and annual policy declarations to Compliance.
Conflicts of interest are addressed, evaluated and appropriately managed in accordance with our Conflicts of Interest Policy.
Morningstar’s Conflicts of Interest Policy is supported by the following related policies: Code of Ethics; Personal Trading Policy; Conflicts of Interest Policy (Directors and Officers) and Gifts, Benefits, and Entertainment Policy.
Among other things, the above policies include steps to prevent personal profit, direct or indirect, from knowledge about pending or currently considered securities transactions or unpublished investment research.
The above policies also address gifts and entertainment. Employees are not to accept or offer any gift, entertainment, meal, or favour that would influence or potentially influence their conduct, or that could reasonably be viewed by an outside observer as affecting their judgment or actions in the performance of their duties on behalf of Morningstar.
We maintain registers that record all conflicts identified and reported to the Compliance team, as well as gifts and entertainment received and given by Morningstar.
The Risk Management Framework comprises a Risk Management Policy, a Risk Appetite Statement and the Risk Assessment Process which includes risk profiling and assessments, monitoring and reporting. Our risk appetite guides our decision making and assists with prioritisation of risk mitigation strategies (including allocation of resources) for those risks beyond our Risk Appetite.
The Compliance & Risk team is responsible for managing the overall Risk Management Framework which includes effectively administering, maintaining and improving the framework as well as providing guidance to the business teams on risk management matters.
Key risks identified by the Risk Management Committee are included in the business’ risk register, are monitored by the risk owners in the business and by Compliance & Risk.
Our compliance obligations are covered by the Compliance Program for Morningstar’s Australian business as well as each Morningstar Managed Fund’s Compliance Plan.
The goal and objective of the Compliance Program is to ensure that Morningstar complies with its obligations arising from laws and regulations, internal policies and procedures, and contractual arrangements.
The Compliance team is responsible for managing the Compliance Program which includes effectively administering, maintaining and improving the Compliance Program as well as providing guidance to the business teams on compliance matters. Key compliance obligations identified by Compliance are allocated to individual managers and monitored through compliance software and other compliance database techniques on a quarterly basis. The Compliance team reports to the Board and the statutory Compliance Committee on a quarterly basis.
Our Compliance Incidents Policy documents the framework and governance steps to be followed by staff when identifying and reporting errors and operational incidents. All staff sign an annual attestation that they understand the Compliance Incidents Policy.
Once an incident is recorded, appropriate action is taken to rectify the incident and appropriate measures are implemented to prevent recurrence. There are no minimum thresholds or maximum limits embedded within the policy and each incident is recorded by Compliance irrespective of impact caused.
All Morningstar’s Managed Funds are unit priced by our external custodian and administrator (JPMorgan) and have tolerance levels applied against a benchmark movement. Where a tolerance level is exceeded, JPMorgan will provide evidence to support the excess which Morningstar considers when performing their unit price review. Any other unit price discrepancies determined by Morningstar are raised to JPMorgan for investigation and resolution prior to Morningstar releasing unit prices to the market. Unit pricing errors are dealt with in accordance with our Unit Pricing Policy.
In general, performance calculation errors are rare. Unit Pricing errors would be the primary cause of performance calculation errors. If a performance calculation error is identified, performance is recalculated and reports re-released subject to the materiality.
Brokerage and commissions are a key consideration for the Morningstar Investment Management investment process and we aim to minimise transaction activity, reducing the transaction costs including brokerage and commissions.
Where Morningstar appoints an external manager to manage a portfolio, we apply a long-term conviction-led approach that involves high thresholds for initial due diligence research but once appointed, typical holding periods for managers are in excess of 5 years. A major cost of multi-manager investing is excessive and regular manager switching; and this approach minimises costs associated with high manager turnover. We require underlying managers to account to Morningstar for any fees, brokerage and commissions, income or the value of any other benefit (called ‘soft dollar receipts’) which it or its related party may receive in relation to the investment of the portfolio.
We undertake detailed monitoring of implementation costs including transaction costs such as brokerage, commission and custody settlement in conjunction with our annual Product Disclosure Statement (PDS) updates.
3. Asset Stewardship
Provide a description of Morningstar’s approach to exercising effective asset stewardship of investee companies on behalf of clients in the below areas:
Morningstar’s approach to providing effective asset stewardship on behalf of clients lies in its approach to initially assessing and undertaking due diligence on appropriate investments. This is supplemented by ongoing monitoring, engagement and communication which considers both financial and non-financial matters. Our approaches across both internally managed strategies and external managers are summarised below:
Internally managed strategies
A primary focus of our internally managed, direct equity investment process is to identify and monitor how the companies, in which we are invested, manage their capital for the benefit of their shareholders. . Our quality and valuation metrics are built upon the actual financial performance of companies in the context of the industries in which they operate. We also monitor and incorporate the propensity and ability of corporate management to return capital directly to shareholders. Another key component of our process is our qualitative assessment of company management through internal and external research analyst reports, company reports, and media reports.
Our due diligence process for evaluating managers and/or strategies combines quantitative data analysis with a qualitative assessment of a strategy’s personnel and resources, investment philosophy and process, and firm stewardship. We acknowledge that truly skilful managers are not a commodity, but rather, a scarce resource. Accordingly, our critical focus in researching managers is to assess and identify key areas where a comparative advantage exists and whether it can be sustained.
In this context we focus on the following:
Our process is designed to keep abreast of any changes occurring with the direct investments or the managers we invest with. This is done through regular monitoring and frequent contact and engagement with the management and fund managers of the respective companies. Our team continues to evaluate the investment options based on the same process used in the review and selection stage, but we understand that the ongoing due diligence of an investment option presents different challenges. Therefore, Morningstar Investment Management focuses on specific issues or events that could change its opinion of the investment option and challenge its original investment thesis.
The ongoing monitoring process focuses on the following issues:
Morningstar Investment Management is constantly developing and evolving our skills and capabilities to ensure our approach to asset stewardship is best practice in Australian and global investment markets. On this basis we continue to invest further in areas of ever increasing relevance to investors including behavioural science and environmental, social, and governance (ESG) research.
In 2017, Morningstar, Inc. acquired a 40 percent ownership stake in Sustainalytics, a leading global provider of ESG research and ratings. It rates the sustainability of listed companies based on their ESG performance. This strategic alliance continues our commitment to helping investors integrate sustainability considerations into portfolio decisions. This follows previous collaboration with Sustainalytics in launching the Morningstar Sustainability Rating, the launch of the Global Sustainability Index Family, and the release of company level ESG metrics for the holdings of 35,000 mutual funds and ETFs.
Morningstar Investment Management considers ESG principles when making investment decisions and these are contained in our ESG and Responsible Investment Policy.
Another area of client asset stewardship which is of increasing importance is the approach to proxy voting. Morningstar recognises that voting rights have economic value and that the exercise of such voting rights is a fiduciary duty. We generally outsource stock specific governance matters to appointed investment managers. Morningstar Investment Management believes that its appointed managers are in a better position to manage the proxy voting requirements in respect of their portfolio holdings.
All investment manager agreements mandate the appointed fund manager to vote on resolutions put to shareholders in accordance with their proxy voting policy. In some instances, as part of an investment mandate, we will authorise our investment managers or agents to exercise our voting rights in accordance with our proxy voting principles. To supplement these principles Morningstar can choose to engage with other investors, industry groups and/ or industry associates and bodies to formulate an approach to ensure securing the best client outcomes. In all circumstances, we retain our voting and other rights in relation to Scheme investments and reserve the right to override a manager’s ability to exercise such right.
Morningstar Investment Management manages proxy voting in accordance with its Proxy Voting Policy.
To ensure transparency to the end client Morningstar produces a range of periodic (monthly, quarterly and annual) and ad-hoc reports and presentations consistent with regulatory and compliance requirements and client service level commitments. These form an essential pillar of Morningstar’s client engagement. Performance reports and presentations are developed in-house using proprietary and third-party software, leveraging our internal systems and databases. Morningstar assigns ’owner’ and ‘reviewer’ responsibilities for each report in accordance with our Publication Approval Policy. This ensures that client reports are comprehensively reviewed by the relevant stakeholders at the appropriate stage of production. Finally, reports are communicated to clients via email, website, third party platforms and/or our proprietary adviser portal (Information Library).
Morningstar is well-resourced and adept at communicating in a client friendly manner. Our focus is on presenting the potentially difficult world of investing in a way that can be understood and appreciated by the end client, resulting in better investor engagement. In addition, wherever possible, our communication encompasses behavioural finance principles, helping clients to stay the journey and achieve their longer-term investment objectives.
This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). © 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. 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. 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 Client Services Team on 1800 951 999.