This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.
Dear Client,
Global events have a way of capturing investors’ attention, particularly when they dominate news headlines and trigger sharp market movements. June was a good example. A fragile ceasefire in the Middle East, along with hopes of a broader peace agreement, helped drive oil prices around 20% lower during the month. Lower oil prices are generally viewed as positive for economic growth and corporate profitability, and share markets responded favourably.
However, as investors, it’s important to separate what feels significant in the moment from what is likely to matter over the long run.
While geopolitical developments can influence markets in the short term, they are often just one chapter in a much longer investment story. The reality is that the situation in the Middle East remains uncertain, and there is every chance that further setbacks or tensions could lead to renewed market volatility in the months ahead.
For many investors, these periods of uncertainty can be uncomfortable. When markets fluctuate sharply, it’s natural to wonder whether action is required. Yet history consistently shows that short-term volatility is a normal feature of investing, not a sign that something has gone wrong.
In fact, research by Nobel Prize-winning economist Richard Thaler, and replicated by the behavioural science team at Morningstar, highlights just how different markets can look depending on the timeframe you choose. If, for example, you check the value of an investment in the S&P500 every day, there is roughly a 46% chance that the market will be lower than the day before. In other words, daily market movements are close to a coin toss.
If you extend your observation period to one year, the likelihood of experiencing a negative return fall to around 26%.
This helps explain why long-term investors are often better served by focusing on their goals rather than daily market movements.
A useful analogy is planting a tree. If you dig it up every few days to check how the roots are developing, you’ll only interrupt its growth. The tree needs time, patience and the right conditions to flourish. Investing works much the same way. While there will inevitably be storms along the way, long-term growth is typically achieved by staying invested and allowing compounding returns to do their work over time.
The headlines will continue to change. Markets will rise and fall. Unexpected events will occur. But for investors with a well-considered plan, these short-term developments should be viewed in the context of a much bigger picture.
So, what’s the key takeaway? Successful investing is rarely about predicting the next headline or market move. It is about maintaining perspective, remaining disciplined during periods of uncertainty, and giving your investments the time they need to achieve their long-term potential.
Signoff
Important Information
As noted previously, this document is intended to support your service proposition to clients and the commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. The information, data, analyses, and opinions presented herein are provided as of the date written and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use
From the desk of the CIO: Mind the market gap
By Bryce Anderson, Head of Multi-Asset Strategies, Australia
Key points
We’re seeing a wide divergence in market returns
Loose capital is back and AI leaders are taking advantage
We recommend a measured view on the macro headlines.
After a ripsnorting rally, markets had a more subdued month reminding us that there can be big differences in returns and AI is not the only game in town. Instead of a rise in most sectors and countries, we saw both losses and sizeable gains. We made money on our healthcare exposure which we hold as a diversifier and for growth as well as Korean equities where we retain a modest position after profit taking.
The big attention grabber was of course the man with the world’s biggest megaphone (Elon Musk) shooting for the stars with an audacious capital raising for SpaceX. Our Morningstar Equity Research colleagues pointed out that the float price for that IPO baked in way too much optimism and it is no surprise that after its brief blast, gravity has taken hold and pulled price back down again. We suspect though that this is closer to the start than the end of a period of easy capital. Expect more capital raisings from in vogue companies tapping equity and debt markets. For the first time in 5 years the investing public are directly involved in funding new investments, not just private capital and the hyperscalers reinvesting their profits.
Our own metrics tracking equity capital supply are very clearly showing conditions easing, meaning that it is becoming much easier to raise larger amounts of money on terms that are more favourable to companies than investors. To be fair it is not on a par with peak speculative episodes in 2021, 2006 or 1999. This time it is dominant franchises or leaders that are seeking funding, SpaceX raised about $85bn, Alphabet $80bn and Korean chipmaking giant SK Hynix $26bn. More is to come with IPOs expected for Anthropic and OpenAI plus fintechs including Revolut and Stripe.
Given our process, we tend to look where the opposite is happening — where capital is leaving and companies are under pressure, often leading to short-term negative share price performance. These conditions create the gap between intrinsic value and price. Consumer cyclicals are one such area today, given the short-term pressures they’re facing. Patience and a long-term approach are key to realising this value, although it may take time, and we don’t know what the catalyst will be. We’ve seen this movie before.
A prime example was oil and gas companies globally during COVID, when heavy discounting created an extremely attractive opportunity despite prevailing sentiment. Investing in these companies paid off handsomely once the discovery of a credible vaccine, and later the supply shocks from the embargo on Russian energy exports in 2022, pushed energy prices sharply higher. These events provided the catalyst for price and value to converge, but neither was anticipated when the initial investment was made. That’s the nature of these catalysts: they’re often geopolitical, and they arrive on their own timeline.
Which is the bigger point about geopolitical risk, including the current US-Iran conflict : their impact is mostly fleeting, and they are simply not predictable. If investing is about getting the odds on your side, then it is better to focus on the fundamentals that drive longer term inflation, interest rates and corporate earnings growth rather than geopolitics. While it’s vital to understand how the economic and political environment is evolving, the keys to generating return and managing risk remain the same: fundamental diversification, broad research, and favouring undervalued investments.
These are the science‑backed ways to save money during a no-buy challenge
By Dr. Danielle Labotka, Behavioural Scientist
Whether you’re joining No-Buy July or No-Spend January, here are strategies for staying on track and building saving habits that work all year.
Have you cleaned out an overstuffed closet and thought, “I really need to stop buying so much random stuff.” It’s not easy to break the shopping habit, but as a behavioral scientist who joined No-Spend January, I can help.
In January, after all the holiday parties and shopping, I felt like I had less control over my finances than I’d like. So, I embarked on a no-spend challenge to hit the reset button: I would resist temptation and only spend on essentials.
The Benefits of a No-Spend Challenge
It gets you out of spending mode.
I’m not typically a big spender anyway, but once I start, it’s all too easy to keep going. And there’s a reason for that—a cognitive bias known as hyperbolic discounting. We tend to place greater weight on immediate satisfaction, even if focusing on the long term will have a greater payoff.
This might be counterintuitive, but feeling stressed about finances can also get us off track. While some people respond to financial stress by saving more, others respond by spending more in order to regain feelings of control.
It shifts you into saving mode.
Though spending in the moment can be satisfying, the things I’m saving for—long-term goals like retirement and some shorter-term goals, too—would pack a bigger punch over time. For example, I live in an old house, and I wanted to check off several home improvement projects while still being able to take a nice trip.
Even with those goals in mind, No-Spend January wasn’t easy. We’re bombarded with social media posts pressuring us to spend and an endless stream of marketing emails. Another challenge is that brick-and-mortar stores are set up to encourage impulse buying. (I almost ended up the not-so-proud owner of a new travel tumbler when I ran out to get tea.)
Fortunately, being a behavioral scientist helped me not just stick to No-Spend January but also turn it into an opportunity to improve my finances by saving more. If you’re trying No-Buy July, maybe this will help you, too.
Research shows that the most motivating goals often relate to security, such as retirement, or to self-actualization, such as opening a business or contributing to charity.
It’s also helpful to connect your goals, which can boost motivation. For example, I could pair “save for vacation” with “donate to charity” by giving any leftover amount from my vacation budget to my favorite nonprofit.
Whenever you feel yourself wavering, come back to your goals for a dose of motivation.
2) Figure out what you can and should save.
This step may not make me popular with the math-averse, but it’s important. When we’re stressed about money, we may convince ourselves that all of our current spending is more of a priority than saving. So, start by doing a full review of your budget. A no-spend challenge is the perfect time for this because you’re inherently only spending what you need to.
Record how much money comes in each month, how much goes out, and where it goes. You may find that you already have a surplus. This is an easy win; commit to saving that much money each month. You can even decide how much of it goes toward each of your financial goals. But if there’s no extra money, take a hard look at your spending and figure out where you can spend less.
Give yourself a bit of a reality check, too, by calculating how much you need to save each month to achieve your goal when you want to. It’s especially eye-opening to calculate how saving more or less each month can affect your ability to retire. Don’t get discouraged if you can’t save as much as you’d like right now; that happens to everyone. By saving what you can now and coming back to this practice when your circumstances change, you can still make serious progress toward your goals.
3) Take it out of your hands.
OK, you’ve decided what you’re saving for and how much. Now automate it. Because let’s face it, if you have to manually transfer money into savings, chances are it won’t always happen. But if you remove yourself from the process, you’ll save more and be more likely to stick with your plan for months or years to come. I feel more at ease knowing the money I need for home improvements is automatically moved to my savings.
Shift Your Perspective and Try Some Tricks
Talk to yourself. Self-talk is one of the earliest ways we learn to regulate our behavior, and it can help us as we adjust our spending habits.
Try this meme: Look at your belongings and say, “This used to be money.” One of my colleagues says this worked for her. Before she’d buy something, she pictured seeing it in her house and recited that sentence. It was a game changer.
Look at the (hopefully) distant future and tell yourself: “Someday my kids will have to deal with my stuff. Do I want to add this to the pile?”
Satisfy the urge without spending. Novelty can trigger the release of dopamine (a feel-good chemical in the brain), even if you don’t make a purchase.
Go to the library and browse to your heart’s content. Check out a few books and bring them home. You don’t have to read them, but the act of “shopping” at the library might be just what you need.
When Instagram or TikTok tempt you, try going to a “dopamine site” that simulates the shopping experience. They’re not for everyone, but if you crave the ritual of consumption, these sites let you scroll, add to cart, “pay,” and even get shipping notifications. When nothing shows up at your doorstep, you’ll hopefully be relieved you didn’t spend money.
Organize or join a clothing swap among friends, neighbors, or co-workers. You might even find one in your community. Everyone brings a few things and maybe leaves with a few.
Address the habits or conveniences that make shopping too easy. Introducing extra steps can slow down the thinking that can cause us to spend.
Delete mobile payment services (such as Apple Pay or Google Pay) from your phone.
Put your credit card in a nesting doll situation—a zippered bag inside another zippered bag, and so on. If you’re hard core, you could padlock it.
Use cash so the spending feels more tangible.
If your favorite store is on the way home from work, take a different route.
A no-spend challenge is usually only a month, but it can inspire better saving habits that serve us all year—and beyond. We can do this!
Is a client who fired their financial adviser a red flag?
What investment clients are seeking the next time around.
By Samantha Lamas, Senior Behavioural Researcher
Imagine meeting with a prospective client for the first time. After a bit of small talk with “Evie,” you realize she already has a solid understanding of financial topics and the role of a financial advisor. She also already has a decent plan in place and a considerable amount of assets.
The catch: Evie had a financial advisor in the past, but she fired them. (At this point in the conversation, you do not know what prompted the fire or any other details.)
Although some financial advisors might see Evie as no different from any other client, others might be hesitant to move forward. A financial advisor might assume that Evie has unrealistic expectations that no advisor can meet. Should you proceed with caution, or treat her like any other prospect?
The answer is: Neither is quite the right choice.
Clients who have fired a financial advisor aren’t inherently a red flag, but they do require a slightly different approach.
What Happens After a Client Fires Their Financial Advisor?
To move beyond these assumptions, we compared the actions and motivations of three categories of investors:
Switchers: Current advisor clients who have fired an advisor in the past.
Keepers: Current advisor clients who have never fired an advisor in the past.
Leavers: Former advisor clients who fired an advisor and never hired another.
In Evie’s case, she’s a potential Switcher.
Morningstar research finds that Switchers are rare, with only 27% of investors who have fired an advisor choosing to work with a new financial advisor. These clients typically don’t churn quickly through advisors—in our sample, Switchers, on average, fired their advisor after three years.
When we looked at why Switchers fired their financial advisor, the most common grievances were about the quality of advice, the quality of the relationship, and the cost of services. Switchers expected their previous financial advisor to provide worthwhile advice built upon a solid advisor-client relationship—in other words, the expectations of any client.
What switchers are looking for now
Interestingly, when it comes to their next relationship with a financial advisor, Switchers don’t simply carry their past frustrations over. We found that the reasons they hire a new advisor often differ from why they left the last one.
When looking at the hiring demands of Switchers compared with Keepers, we found that Switchers placed less importance on addressing a specific financial need. This makes sense given that they tend to be further along on their financial journeys and often have already addressed any urgent needs. Switchers also tend to place more importance on the quality of advice, probably because they can compare new advice options against prior experiences and existing plans.
At the same time, when looking at the other top hiring reasons of Switchers versus Keepers, there are many similarities. Like other clients, Switchers still hire an advisor for reasons about their discomfort handling financial issues on their own and their desire for behavioral coaching.
How can financial advisers best communicate with switchers?
Prospective clients like Evie shouldn’t be treated as a red flag, but they also shouldn’t be treated like someone entirely new to financial advice. Given their previous experiences, these investors have a stronger ability to evaluate advice and, in some cases, may have lingering skepticism.
Even so, just like most clients, they are looking for a financial advisor who delivers on the core elements of the advisory relationship, which include providing comfort when making financial decisions, engaging in behavioral coaching, and building a personal connection with clients.
For financial advisors, here are a few things to keep in mind when approaching conversations with Switchers based on these insights.
Acknowledge the past, but don’t anchor on it
Clients may bring up why they left their previous financial advisor. It’s important to listen to and validate their experience, but avoid dwelling on those specific grievances. Instead, transition to forward-looking questions like: “What would a great advisory relationship look like for you now?”
Reconstruct what “good” looks like
If the client is stuck on past experiences, help them shift into a more positive mindset by asking what their previous advisor did right. No matter how short this list is, it can still reveal what the client values and provide some direction on where to build moving forward.
Lead with how you think, not just what you do
Switchers are less likely to be hiring you for a single task. These investors will be evaluating the quality of your advice, which includes the quality of your reasoning, how personalized your recommendations are, and whether your advice improves on what they already have.
Clients who have fired an advisor aren’t an immediate red flag. Instead, they are informed consumers who need more than to check something off their to-do list. For advisors who can meet them at that level, they represent not a risk, but an opportunity.
From the desk of the CIO: IPO fever reaches new heights
By Bryce Anderson, Senior Portfolio Manager
Key points
Strong markets continue
Surge in AI-driven capital raising
Discipline matters more than ever.
Markets continued their strong run in May, extending a powerful rebound from the March lows. Equity returns have been led by technology, particularly companies benefiting from rapid growth in Artificial Intelligence. This has been especially evident in chipmakers in Korea which have delivered exceptional returns on the back of surging AI spending and lack of chip supply.
This strength has created favourable conditions for companies to raise capital. A number of high-profile initial public offerings (IPOs) are now coming to market, including SpaceX, Anthropic and OpenAI. These are large, fast-growing businesses at the forefront of innovation, and investor interest has understandably been strong. In addition, established companies such as Alphabet and Meta are also raising significant amounts of new capital.
At first glance, the scale of these fundraisings appears substantial, but relative to the size of global equity markets it is not extreme. However, there is an important nuance. IPOs typically involve only a portion of total shares being sold initially. This means further supply can come to market over time as existing shareholders reduce their stakes. As a result, what we are seeing today may be the beginning of a broader increase in equity supply.
For investors, it is helpful to step back and understand how these periods typically unfold. Capital raising reflects a balance between two competing forces: business owners seeking to raise funds at the lowest possible cost to them, and investors aiming to deploy capital at valuations that offer strong long-term returns.
In more normal conditions, this balance is healthy. Capital is allocated efficiently, and opportunities arise across a broad range of businesses. In more difficult periods, such as during the early stages of the COVID-19 crisis in 2020, capital becomes scarce. While this can feel uncomfortable, it often creates some of the best investment opportunities, as prices are lower and terms are more favourable for investors willing to be patient.
By contrast, periods like today – where enthusiasm around new technologies is high—tend to encourage greater capital raising. Investors are more willing to pay higher prices to gain exposure to perceived growth opportunities, and companies respond by issuing new shares at attractive terms for themselves.
This can lead to strong short-term performance but also increases the risk that future returns disappoint if expectations prove too optimistic. This is exactly what happened during the last IPO surge in 2021.
We are seeing early signs of this more optimistic phase emerging again, particularly around Artificial Intelligence and related technologies. These innovations are genuinely important and likely to shape the future economy. However, the key challenge for investors is not identifying exciting themes but determining the right price to pay for exposure to them.
This is where discipline becomes critical. IPOs are not inherently good or bad investments, but they are often launched when investor demand is strongest. That means valuations can already reflect high expectations. Investors who lack the resources or expertise to assess these opportunities carefully may be at risk of overpaying.
Prices today reflect a lot of optimism despite the fast pace of change and extreme uncertainty about how technology will develop and whether the ultimate winners will be today’s dominant businesses, or tomorrow’s consumers that benefit from competition.
In Morningstar portfolios we are favouring other sectors and markets that offer better risk adjusted returns including healthcare, defensive sectors and emerging markets.
IPO fever is when investors get carried away so it is critical to look at both sides of the story and base investment decisions on research, not the sales pitch.
Adviser-to-client template: Hype or reality? What the astronomical SpaceX IPO means for you
Dear Client,
It’s all over the news: SpaceX is went public on Friday 12 June, at a valuation of approximately $1.8 trillion USD. This means that Elon Musk’s space exploration company has had the largest IPO, or Initial Public Offering, in history.
But it’s not on its own. In the coming months, IPOs are also expected from Anthropic and OpenAI. Together, these three companies are expected to be worth roughly $3.6 trillion USD. That makes them nearly five times the combined value of the 10 largest US IPOs of all time.
The numbers are astronomical, but crucially, they’re not everything. Yes, these companies are new and exciting. But they’re not underappreciated, and that’s a key aspect to consider in investing.
Expectations vs. reality
When the numbers are this big, it often means that the offering is better for the seller than the buyer. This is particularly true of the initial period. History strongly implies you’ll get a chance to buy at lower prices after the early rush subsides, as noted in the table below.
This is to say that high expectations can often be synonymous with disappointment. It’s not to say that SpaceX, or other companies with high valuations, might not become an attractive investment later. Facebook is one example of this, with a rocky start when it first went public, and then going onto being one of the most profitable stocks of all time. But at the IPO, history suggests that the odds are not in investors’ favour.
Patience is key
It’s another example of why taking a patient and measured approach is perhaps the single most important thing investors can do. While IPOs can whip up the dreaded Fear of Missing Out, FOMO is not enough to stake an investment decision on.
Our investment manager, Morningstar, is keeping a close eye on the offering, evaluating the relationship between price and value to ensure robust portfolios that seize the right opportunities while filtering out market noise. I’ll also ensure to keep you updated if any notable changes are made.
In the meantime, if you have any questions about your portfolio, feel free to reach out – I’m always happy to have a chat.
Adviser-to-client template: Focusing on what’s important
For financial advisers to use with clients.
This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.
Dear Client,
Following a challenging period in March, global sharemarkets rebounded strongly through April, with that positive momentum continuing into May. Indeed, and this may surprise you; the S&P 500 is now meaningfully higher than it was immediately prior to the start of the Iran conflict. I mention this because the natural behavioural response to significant and uncertain geopolitical events such as this, is to sell up, move to cash, and to only return to markets once it feels “safe” to do so.
While this reaction is understandable, it can be detrimental to long-term outcomes. Human behaviour is inherently geared toward short-term feedback and the avoidance of loss, which can lead to emotionally driven decisions during periods of volatility. Investing, however, requires a different mindset — one that prioritises patience, discipline, and the ability to stay focused on long-term objectives despite short-term uncertainty.
As the old adage goes, the only certainty is uncertainty! And so how do we navigate what feels to be an increasingly uncertain political and economic environment – well, by using the same investment principles that have stood the test of time:
Remaining anchored to a well-defined investment strategy is critical, as it allows you to take advantage of opportunities when markets overreact. In this regard, Morningstar’s valuation-driven asset allocation approach continues to focus on identifying gaps between market prices and the underlying true value of assets, i.e. they continue to look for assets that are “on sale”.
Diversification – in its simplest form, this is “not having all of your eggs in one basket”. Diversification is commonly referred to as an “investor’s best friend” because it helps to build portfolios that remain resilient across different market environments.
Markets will do whatever they will do, particularly over shorter time periods which are often heavily influenced by investor emotion. What we can control, however, is how we behave, and so I trust that the knowledge of having your portfolio managed via a robust, consistent an repeatable investment approach brings you peace of mind, now, and into the future.
From the desk of the CIO: Markets bounce back, with clear AI theme
By Bryce Anderson, Senior Portfolio Manager
Key takeaways
Equity markets continue a significant bounceback
AI is proving highly impactful, though remains difficult to predict
These types of investments can contribute to market shocks, which in turn create opportunities for prescient investors.
2026 is rewarding investors that stay the course. Equity markets have staged a powerful comeback from the March lows, buoyed by larger than expected corporate earnings. Even though bond markets remain hostage to inflation fears, total portfolio outcomes have been better than usual. Worse inflation outcomes are being priced into bond markets which now imply a rise in interest rates. For reasons outlined in my last CIO letter, we are more sanguine about the medium-term inflation outlook because of structural changes in energy demand and supply plus more slack in labour markets.
AI remains a key theme driving markets with clear winners and losers. The step up in AI capabilities has shone a light on companies that are vulnerable to reduced pricing power and more competition, as noted recently by our colleagues in Morningstar Equity Research. In their recent study of AI impacts, they downgraded 40 companies in terms of the Morningstar Economic Moat Ratings. These denote competitive advantages that enable firms to maintain superior profitability for longer and so make them more valuable. Enterprise software and IT services were most heavily impacted, sectors we held less of than usual in portfolio due to concerns about overvaluation.
A clear winner from AI are companies making essential inputs needed to accelerate computing power. This is where a lot more money is being spent, creating a big imbalance between demand and supply, for specific types of computer chips. Samsung and SK Hynix in Korea are big beneficiaries, reporting ballooning profits and new orders. The fundamentals underpinning these businesses have improved, supporting a large rise in their underlying value and share price. We added exposure last year which paid off handsomely in 2025 and 2026.
AI is both highly impactful and hard to predict. In this way, it’s similar to geopolitical shocks that have roiled markets. The silver lining is that shocks can create great buying opportunities when there is indiscriminate selling. To take advantage, you need to prepare in advance, have broad research coverage to spot when prices reach attractive levels and then be prepared to act. That approach worked well in the 2020 COVID shock, the 2022 inflation shock, the 2023 Silicon Valley Bank collapse, the 2024 South Korean coup attempt and the 2025 “liberation day” sell off. The investments we made in their wake, all boosted client outcomes, from high yield bonds and oil and gas shares to infrastructure companies, financials and Korean equities.
Adviser-to-client template: A sell-off, a rebound, and investing through all conditions
For financial advisers to use with clients.
This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.
Dear Client,
After a challenging March, markets have rebounded strongly through April, with some major share market indices even testing new all‑time highs. It’s short and sharp market movements like we’ve just witnessed which provide a timely reminder that investing is a long-term game.
It’s also worth remembering that investing can feel counter‑intuitive. As humans, our brains are naturally wired for short‑term rewards and quick feedback, which is why market moves can trigger an emotional response. Investing, however, requires delaying that instant gratification in pursuit of long‑term outcomes that are inherently uncertain. Recognising this challenge is important, as it reinforces why discipline, patience and a structured investment process are so critical to long‑term success.
It’s understandable that short‑term market moves can be unsettling, however, reacting to volatility often does more harm than good for long‑term investors. Staying focused on long‑term goals, rather than day‑to‑day market noise, remains critical to achieving better outcomes over time.
So, how can we avoid overreacting to short-term noise but potentially take advantage of opportunities that present themselves when there has been a market overreaction? Morningstar apply this discipline through a valuation‑driven asset allocation approach. In simple terms, they seek to take advantage of dislocations in asset prices during periods of market volatility. Through March, markets generally fell in unison, meaning few assets became meaningfully cheaper relative to their fair value and limited opportunities emerged.
With geopolitical uncertainty still present, periods of market volatility are likely to reappear at some stage. When they do, Morningstar will be looking for signs of overreaction, where asset prices move away from fair value and become more attractively priced. That will be their signal to react.
This approach also reinforces the importance of diversification across asset classes, countries, sectors and sources of return, helping portfolios remain resilient through different market environments while staying aligned with long‑term objectives and helping to smooth out the bumps in the road somewhat.
Importantly, investors do not need to take any action during these periods. Morningstar continues to actively manage portfolios on their behalf, applying a disciplined, valuation‑aware process through both calm and volatile markets. Having that peace of mind can be especially important during times of uncertainty, as making emotional decisions in response to short‑term market moves can be one of the most damaging things an investor can do to their long‑term outcomes.
How to discuss portfolio diversification with different types of clients
By Samantha Lamas, Senior Behavioural Researcher
For financial professionals and advisors, understanding the value of portfolio diversification is taken as a given. We know a well-diversified portfolio comprising assets with different performance characteristics can lead to better risk-adjusted returns instead of relying on a single asset class.
However, when presenting a financial plan to a new client, the advisor may say something like: “We created this diversified portfolio that puts you on track to meet your goals…” and then go on to discuss another aspect of the client’s holistic plan—completely skipping over the client’s understanding of diversification in portfolio building.
For everyday investors, portfolio diversification may seem counterintuitive because it often requires adding assets that look “bad” in the short term, with benefits that only materialize over years. Others assume the concept is simple (“don’t put your eggs in one basket”) and underestimate the complexity behind selecting uncorrelated assets. Thus, an advisor speeding past a phrase like “diversified portfolio” may be committing one of the seven advisor faux pas we identified as hurting the advisor-client relationship: using financial jargon.
Moreover, spending just a little more time on concepts like portfolio diversification can help showcase your value to clients. Our research finds that investors want more than just portfolio advice: They want a coach, teacher, and a sounding board. Advisors are uniquely positioned to play these roles for investors, and that can start by tackling concepts like portfolio diversification when needed.
Now, the question is, how?
Emphasize What Portfolio Diversification Isn’t
One of the difficulties in understanding portfolio diversification is that it sounds like a familiar concept. Everyone knows the saying, “Don’t put all your eggs in one basket.” Unfortunately, this phrase cannot be applied to every situation and, when it is, it can lead to disastrous mistakes.
In our own research, we found that when presented with three exchange-traded fund options that track the S&P 500 but have different fees, many investors choose to put some assets into each option, even the most expensive option. In the real world, a decision like this could result in a portfolio with significantly higher fees and overlapping securities since each fund followed the same index.
When discussing portfolio diversification with clients, it may be worthwhile to emphasize that this diversification is not as simple as just varying your holdings. Instead, it’s about combining assets in a portfolio that tend to behave differently, in a way that still aligns with the investor’s goals and risk profile.
Reframe Talking Points to Address Client Needs
While clarity is good, it can be easy to fall into the trap of overexplaining diversification to an investor and overwhelming them with numbers and graphs. Not only is this unnecessary and probably inefficient, but it can be harmful to the advisor-client relationship—no investor wants to leave their advisor’s office feeling confused.
Instead of throwing mountains of research at a client, advisors should customize their messaging based on their understanding of the client’s values, goals, and preferences.
A simple framework that advisors can use may look like this:
1. Give a Brief Description of Portfolio Diversification
This can be a standardized section in all your conversations and should be true to how you think about this concept. As an example, this can sound like Dan Lefkovitz’s description:Diversification means the investments in your portfolio behave differently. When one asset zigs, the others zag. When developing a diversified portfolio for you, I also take into consideration your goals, time horizon, and risk preferences.
2. Explain Why It Matters to the Client
This section should be personalized to the client. Here’s where you can emphasize specific elements of portfolio diversification that can better resonate with clients based on their personal characteristics and tendencies.
To add some color to this framework and help advisors use it in practice, below are a few examples of how to reframe a portfolio diversification discussion based on common investor personas.
To the Client Who Is a Constant Worrier
Every advisor has at least one client who is in a perpetual state of worry. These clients frequently ask questions like, “How will AI impact the tech sector and my portfolio?” “Will stricter tariffs continue, and how does that impact my plan?” “Will the US dollar continue to decline, and what does that mean for me?”
These are all important questions, but they are all almost impossible to answer definitively. Instead, advisors can refer back to the powers of portfolio diversification with a focus on its ability to reduce the impact of uncertainty. When talking to these clients, advisors can emphasize that portfolio diversification is a hedge against the unknown. It is impossible to know with certainty which area of the market will suffer in the future; thus, a properly diversified portfolio guards against being overly exposed to any one area that falls out of favor, whatever that area may be.
To the Client Who Is Counting Down the Days to Retirement
Other clients may not be so worried about the day-to-day, but they may be minutely focused on their goal of retirement. For these clients, explaining portfolio diversification can be a way to increase their confidence in reaching that goal. Our research indicates that what investors value most in an advice relationship is the advisor’s ability to provide peace of mind that they are on track to reach their financial goals. In this instance, discussing portfolio diversification can be seen as an opportunity to provide that reassurance and, accordingly, emphasize your ability to provide this value.
When discussing portfolio diversification with these clients, advisors can explain how portfolio diversification allows the client to have a smoother ride as they tackle their ultimate goal. Reducing exposure to any one risk smooths out the volatility the portfolio will face while still staying on track to reach the retirement goal. That means fewer dramatic portfolio swings and fewer sleepless nights.
To the Client Who Wants to Maximize Returns
Other clients may ask why you aren’t being more aggressive in your investment picks. These are investors who are more comfortable with risk and may not see the point of prioritizing risk-adjusted returns versus just plain-old returns.
Portfolio diversification discussions can be reframed in a way that addresses their desire to pursue high-return opportunities without taking on excess risk. As Morningstar researchers put it, “Holding a diversified portfolio helps investors expand the opportunity set and ensure they do not miss out on areas that can enhance long-term returns.” While diversification isn’t designed to maximize returns, it increases the chances of capturing whatever part of the market is doing well, while limiting damage from what isn’t.
Diversification Discussions Benefit Both Sides
Diversification can be abstract, but the conversation doesn’t have to be. By avoiding jargon, correcting common misconceptions, and tailoring explanations to client motivations, advisors can make diversification intuitive and meaningful while building a stronger relationship with their client.
From the desk of the CIO: Are we seeing market recovery?
By Bryce Anderson, Senior Portfolio Manager
We’ve seen a market rebound after March sell-off
These events are not a repeat of 2022 or 1970s high inflation.
Markets have staged a rebound after the March sell-off, rewarding investors that stayed invested or topped up portfolios. The sell-off was not large enough to unearth many bargains but it did reduce speculation and injected better value as investors became more cautious. We selectively added exposure in the sell off. Morningstar portfolios continue to blend broad diversification, specific investments to mitigate more extreme scenarios and attractively priced granular opportunities like Healthcare, Consumer defensive and regions like Brazilian equities.
The big question now is whether the stand-off between the US, Israel and Iran will create a lasting and large rise in inflation and trigger economic slowdown.
In the short term, expect higher inflation. Higher oil and gas prices are clearly flowing through to higher goods prices. The longer the hit to Middle East energy production and export, the bigger the inflation impact. Governments are already stepping in to support consumers with subsidies but not to the extent seen back in 2022.
This is not a replay of the 2022 embargo on Russian exports or the start of a 1970s style stagflation. The energy supply shock from the Middle East this time is far less impactful. That’s because the world’s energy supply is way more diverse than before and rapidly increasing. The old saying that “the cure for high oil prices is high oil prices” is borne out by the hunt for alternatives that have lessened oil and gas demand and put downward pressure on prices.
The first is more efficient use of energy across economies, that started back in the 1970s and 1980s. That was followed by the search for newer oil and gas supplies culminating in shale oil, oil sands, and deep sea oil fields including those here in Australia. Our colleagues at Morningstar Equity Research and Morningstar Multi Asset Research point out that gas supplies are surging, much of it from Canada and the US. By end 2027, new natural gas supply is expected to be twice the 2024 gas output from Qatar.
Equally important is the development of solar and wind power generation and electric transport. These strategic alternatives to oil and gas can be scaled much more quickly and cheaply, so at the margin they too are sapping demand for oil and gas.
All these factors mean the probability is low of a large, sustained rise in energy costs from current levels. On top of that, the pass through of higher energy costs to prices of goods and services is muted, by rising unemployment and the impact of AI. Labour markets have far more slack in them now than back in 2022 and the Union dominated wage setting of the 1970s. So, we do not see lasting large economic slowdown or increases in interest rates as likely, especially with interest rates above inflation rates, unlike 2022 and the 1970s.
The big takeaway is that staying invested and remaining well diversified is the most reliable way to manage risk, profit from uncertainty and help investors reach their goals.
This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.
Dear Client,
Geopolitical tensions are continuing to dominate headlines, and the impacts are being felt here in Australia. With the numbers at the bowser climbing, we know you may be concerned about the ongoing impact of the conflict both on your investments and in a broader context. Though recent news of a ceasefire between the US, Israel, and Iran has headlines buzzing, the details can be overwhelming. But, despite the noise, we and our investment manager, Morningstar, are concentrating on the things we can control and taking a long-term approach that’s been designed to withstand volatility.
What we know so far
It’s a fast-moving situation, so let’s stick to the essentials. The US, Israel, and Iran have agreed to a preliminary 14-day pause in hostile actions to allow for broader peace talks. This includes reopening the Strait of Hormuz, a significant shipping channel, though not without conditions. While progress has been made, multiple strikes were still reported across the Gulf after the agreement was meant to take effect.
What this means for portfolios
Morningstar’s long-term investment approach has been tried-and-tested through all types of volatility, including the COVID-19 pandemic, ‘Tariff Day’ turbulence, and even the Global Financial Crisis. By choosing a well-diversified group of assets, rigorously evaluating risk, and paying close attention to the price paid for investments, the Morningstar investment team focus on building robust portfolios that are positioned to weather rapidly changing conditions.
What you should do
As ever, a core principle of successful investing is to stay invested. The below chart, where the grey column highlights the GFC years, shows the difference between moving to cash, moving to cash for one year, and simply holding and staying invested. The blue line – staying invested – is the clear leader.
Source: Clearnomics, MSCI, Federal Reserve. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment.
As you can see, investors who stayed invested not only endured the volatility, but continued to experience an upward trend of returns, even considering additional periods of market drops.
We’re always available to talk
Of course, it can be tricky to withstand this in the moment, so please feel free to reach out for a conversation at any time. If you have questions about your portfolio or your financial plan, I’m happy to help.
From the desk of the CIO: What we know about the oil shock
By Bryce Anderson, Senior Portfolio Manager
Key points
There has been a spike in oil and gas prices
However, the world is less driven by energy prices than in the past
We maintain a focus on risk management.
The outbreak of a wider war in the Middle East has reawakened fears of inflation as energy prices rocketed. This is a classic example of unpredictable and impactful events that continue to occur. In the short time since the start of the Iran war, equity and bonds have sold off while the US dollar and share prices rose for oil and gas companies. The market moves have not been large (at the time of writing) and have not reversed the gains chalked up in the first two months of the year.
What happens next is not knowable. There are many feasible scenarios, each with quite different economic and market impacts. These range from an imminent ceasefire that leaves the existing Iran regime intact to a “perma-crisis” of prolonged conflict that transforms economies.
Investors now face the question of how to respond. Our approach is to review the readiness of our portfolios for what may come, knowing that there is huge uncertainty. As we do this, we are looking at what markets have already priced in and the likelihood of extreme scenarios.
In a nutshell, energy prices, inflation expectations and bond prices now reflect ongoing higher oil and gas prices and no further cut in interest rates from the Bank of England. So far energy prices have risen substantially (approx. 60% and 180% for oil and European gas), but are still considerably lower than in 2022 when European gas prices peaked at over 6 times current levels and oil prices traded above $100 for about 6 months. It’s a far cry from the horror scenario of the 300%+ spike in oil prices in 1973/74 that pushed up UK inflation rates by 9%.
Thankfully, historic energy crises are not a reliable guide to the more probable future scenarios.
Firstly, the world is a lot less sensitive to moves in oil and gas prices. The Shale revolution has transformed the world’s largest economy, the United States, from an energy importer to an exporter. Plus, renewable energy meets far more of our energy needs, in terms of electricity generation and transport. It’s especially important for China, the world’s second biggest economy. Technological advances mean economies are more energy efficient, with the notable exception of power-hungry Artificial Intelligence.
Secondly, inflation is much better anchored. Global prices are being kept in check by overproduction and exports by China, the disinflationary impact of AI, reduced power of unions globally and renewed vigilance by central banks.
Thirdly, interest rates are at more sustainable levels than prior energy shocks, limiting the need for large rate rises to quash inflationary pressures. UK and US Interest rates are already higher than inflation rates and much higher than 2021 and 1972, in inflation adjusted terms.
So, we do not see a return to 1970s stagflation. There is potential for this crisis to create shocks that are more inflationary than deflationary. For this we hold a range of diversifiers such as defensive industries less impacted by business cycles, inflation-linked bonds and liquid alternative investment strategies.
The crisis, like all prior ones, will also create new opportunities. We are closely tracking how events are impacting businesses and asset prices to identify risks and spot opportunities, working closely with Morningstar’s 400-strong research team.
Should your client’s financial knowledge and experience drive risk strategy?
How financial advisers can leverage a client’s sophistication to enhance engagement.
By Nicki Potts, Director of Financial Profiling, and Ryan O. Murphy, Global Head of Behavioural Insights
Global regulatory frameworks stress the importance of incorporating clients’ financial knowledge and investing experience into the advice process, yet research exploring the complex interplay between these constructs, risk tolerance, and risk-taking behavior is limited. Our latest research examines the influence of the factors associated with financial risk tolerance on the portfolio allocation decisions of a globally diverse sample of 1,334 investors. Participants were asked about their financial risk tolerance, experience, knowledge, and cognitive reflection. Portfolio allocation data were also collected at the time of survey completion between February and May 2023 to determine the actual investment risk level of participant portfolios.
We found that the specificity of knowledge and experience matters in risk preferences, and that using a robust risk tolerance measure alone can adequately capture the effect of knowledge and experience in financial decision-making. Does this suggest that knowledge and experience are merely redundant in the risk profiling and advice process?
Experience and Confidence Are Key Drivers of Risk Tolerance
Investing experience and financial knowledge are generally linked to positive financial behaviors, such as higher saving rates, market participation, and better debt management, leading to more informed investment decisions. Individuals with more experience and knowledge are also more likely to have higher risk tolerance and hold more risky assets. However, the domain of knowledge and experience matters. We found that broad factual knowledge alone, such as traditional education, general cognitive ability, and, to a lesser extent, general financial literacy, while useful in helping individuals conceptualize financial decisions, is less effective in helping them engage with the specific demands of financial decisions despite their analytical skills.
On the other hand, direct stock and mutual fund experience and subjective financial knowledge (self-evaluations), which are closely associated with perceived financial decision-making confidence, are shown to have the greatest influence on risk tolerance. These factors are directly related to the cognitive and emotional aspects of financial decision-making. It turns out these factors are more related than general traits such as cognitive ability or education, thus making them better predictors of financial risk tolerance. The emerging research on the importance of subjective financial knowledge, and its mediating relationship with investing experience, suggests that confidence can assist individuals in navigating complex financial situations, even when their objective knowledge is lacking, and that enhancing investing experience can further support the effect of confidence on risk tolerance.’
Practically, this means that interventions aiming to enhance risk-taking behavior may be more effective by combining opportunities for experiential learning with traditional structured learnings. For example, the use of gamified virtual portfolios to stimulate market movements might allow investors to develop a better understanding of risk and composure, increase their familiarization with the stock market, and boost their confidence. Similarly, starting new investors with a small “learning portfolio” allows them to consolidate passive learnings with firsthand experience and develop the emotional discipline that is required when real money is at stake.
Integrating Robust Risk Measures With Personalized, Context-Sensitive Advising Strategies
In our analysis, risk tolerance, when measured using a robust tool, emerged as the primary predictor of study participants’ actual allocation to risky assets, further highlighting the predictive effectiveness of closely aligned factors. That said, while the impact of knowledge and experience on risky asset preference appears to be limited once risk tolerance is accounted for, it would be imprudent for advisers to overlook the role of knowledge and experience in personalizing client engagement and advice strategy.
Advisers who adapt communication style, product offerings, and guidance strategies to the client’s level of knowledge and experience can foster greater understanding and trust in the adviser-client relationship, enhancing confidence in the advice process and investment journey. Simple changes like using more qualitative and affective framing (descriptive and context-based narratives rather than precise statistics and probabilities) and focusing on investing principles rather than products may better serve those just starting on their investing journey to better evaluate risk and rewards.
Further, clients with limited knowledge or experience may benefit from starting discussions and their investment journey with less complex financial products that better align with their knowledge and experience without necessarily altering their investment risk strategies. A suitable plan that aligns with the client’s risk tolerance and capacity, and financial goals, comes first in the investment guidance process. Then, the composition of the investments selected for implementation can be fine-tuned to the client’s level of experience and knowledge. This hierarchical approach is sensible and consistent with existing know-your-client and suitability obligations.
As financial decision-making grows more complex, the future of effective advice lies in distinguishing between what determines risk preferences and what enables clients to live with market volatility. Risk tolerance remains the most reliable predictor of risky asset ownership, but experience and confidence shape how clients perceive and interpret volatility, uncertainty, and advice itself. By prioritizing rigorous risk profiling while deliberately cultivating experience and confidence through personalized engagement, advisers can bridge the gap between optimal portfolio design and sustainable investor behavior. In doing so, they move beyond compliance-driven profiling toward advice that is both empirically grounded and retains the human touch.
This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.
Dear Client,
What a month it’s been. Between persistent, ‘sticky’ inflation here in Australia, a second successive interest rate rise by the RBA, and escalating geopolitical tensions in Iran and the Middle East tipped to push to $3 a litre, the macroeconomic environment is proving unpredictable, to say the least. The headline news feels relentless, and it’s understandable that you may have some questions about your investments.
First, please rest assured that your portfolios are in good hands. Our investment manager, Morningstar, have decades of experience and have weathered the gamut of precedented and unprecedented conditions with their investment principles and process to guide them. By prioritising diversification, taking a long-term view, and ensuring they’re rewarded for any necessary risk they take, they’re able to build robust portfolios designed to withstand volatility. As we often say, volatility is a feature, not a bug, of investing.
Regarding oil prices, though they’ve seen a big jump, they’re still considerably lower than in 2022 when European gas prices peaked at over 6 times the current levels. It’s also a far cry from the 300%+ spike in oil prices in 1973-74 that pushed UK inflation rates up by 9%.
When it comes to forecasting, or attempting to make predictions about what will happen next, we often seen market strategists underestimating or overestimating where markets will finish 12 months on, even with the turmoil of events like war. In the chart below, you’ll see how these under and overestimates in markets are common. That’s why we urge investors to stay invested, trust the process, and stick to their financial plans.
Consensus S&P 500 Index estimates vs. actual returns: 2018 – 2023. Underestimates and overestimates are common. In some years—2022 and 2018—analysts even get the direction wrong.
Source: Morningstar, Inc. “12 Lessons the Market Taught Investors in 2023.” Published January 9, 2024. Indexes shown are unmanaged and not available for direct investment.
Similarly, you may be hearing some chatter around possible recession should the conflict in the Middle East become a long, protracted war. It’s worth noting that recessions are difficult to predict ahead of time, and again, speculation doesn’t necessarily mean a recession is imminent. Consulting firm Fathom Consulting found that of the 469 recessions in 194 countries between 1988 and 2019, the International Monetary Fund had predicted only four by the spring of the preceding year.
Source: Bloomberg, Fathom Consulting, and IMF. Data as of February 23, 2024. “Recession” defined as an annual contraction in real GDP. IMF Working Paper, “How Well Do Economists Predict Recessions?,” Bloomberg, “Economists Lower Recession Forecasts to 40% on US Job Growth Expectations.”
With that in mind, it’s important to remember the fundamentals of successful investing, which is to understand the difference between price and value, and to look to buy quality assets that are worth more than their price at the time of buying. This is what Morningstar are doing across multiple asset classes and markets, looking for opportunities and potential risks. And it’s not just set and forget, as they reassess these decisions every month.
With a well-diversified portfolio of assets that have been purchased at the ‘right’ price with a long-term view, we believe your investments are well positioned to withstand turbulence. Of course, if you have any questions at all, please do reach out to set up a chat.
