Australian Shares Core Portfoliomorningstarinvestments.com.au/wp-content/uploads/... · Australian Shares Core Portfolio Quarterly Update December 2015 Transactions in the Quarter

Australian Shares Core PortfolioQuarterly Update December 2015

Investment Growth of $10,000

Time Period: 29/07/2004 to 31/12/2015

2005 2007 2009 2011 2013 201510,000.0

12,500.0

15,000.0

17,500.0

20,000.0

22,500.0

25,000.0

27,500.0

Aust Shares - Core S&P/ASX 200 TR

Core Portfolio - Top 10 Holdings

Weighting %

Australia and New Zealand Banking Group Ltd

Westpac Banking Corp

Veda Group Ltd

National Australia Bank Ltd

ResMed Inc DR

CASH

BHP Billiton Ltd

QBE Insurance Group Ltd

Platinum Asset Management Ltd

Wesfarmers Ltd

8.2

7.6

6.7

5.6

5.6

5.4

5.2

5.1

4.6

4.5

Morningstar Style Box

27.1 19.1 18.9

3.2 16.9 14.7

0.0 0.0 0.0

LargeM

idSm

all

Value Blend Growth

Equity Style %

Equity Style Value 30.4

Equity Style Core 36.0

Equity Style Growth 33.6

Joel BloomerSenior Portfolio Manager+612 9276 [email protected]

Portfolio Overview

The Core Portfolio returned 6.2% in December quarter, slightly trailing S&P/ASX 200 Accumulation Index's 6.5%. It was a tumultuous year which saw the portfolio post a negative 1.8% return compared to positive 2.6% for the benchmark. Our underweight to energy was the largest industry contributor in the quarter while underweight to banks was the largest detractor, although the latter have retraced materially in January's chaotic first few weeks. Still 2015 was a challenging year for the Core strategy.

There is no shortage of phenomena to worry about at present. Plummeting commodity prices, weakeninghome prices, one of the worst starts to a year for equity markets, smouldering currency wars, and a planet that is literally the hottest it has ever been. Anyone not at least mildly uncomfortable is blissfully unaware. This uncertainty is typically an environment where value is discovered, but the pain has been concentrated in lower quality sectors while many of the companies we'd like to own remain stubbornly expensive.

Commodity prices are an important part of Australia’s well-being. The positives of this are relatively well-known — expanded employment, capital inflows, asset price appreciation, and economic growth to name a few. What a difference a year or two can make, as we now experience the other side of the coin. Expanding commodity production at any cost turns out to have been an egregious and permanent destruction of capital for many firms. Seemingly limitless demand from China for raw materials has actually started to decline in spots, turning the commodity industry, and countries dependent on it, upside down to varying degrees. It is no surprise to us that the resources sector is volatile and lacking in competitive advantages (economic moats), but the sheer voracity of the demise has surprised even our generally sceptical view of the space.

With the Australian equity market down a fair amount, we are doing what we should given our long-term valuation-driven approach — looking for mispriced opportunities. Unfortunately, less attractive businesses have driven much of the decline supplemented in no small part by the big four banks which are still uncomfortably large index constituents and facing problems of their own, such as regulation, rising bad debts, and a tenuous housing market. Meanwhile, the more defensive quality companies have held or even gained ground. Healthcare, property, and industrials with foreign currency earnings, for example, seem to have gone from loved to uncomfortably crowded trades in some instances. Nonetheless, we stay the course and search for value hoping for uncertainty to put sales tags on our watch list companies.

The upcoming earnings season could be one of the more interesting compared to the last few years, given the dislocations that have already occurred and others that seem on our doorstep. A few issues we are watching closely that might stir value in the not-to-distant future are tangential impacts of the resources collapse, a potential disorderly weakening in home prices, and disruptive currency fluctuations.

Currency is likely to be a critical factor in Australia during the next couple of years. Recent inflation figures suggest wages are stagnating while overall inflation rises, partly due to the things we import becoming more expensive as a result of Aussie dollar weakness. A lower Aussie dollar is often seen as a panacea fix, but going from currency strength to weakness and its myriad implications can rarely be smooth, not to mention there isn't much left of Australia's manufacturing base to be restarted.

Tourism from China has no doubt grown, but devaluation of the yuan seems a reasonable stimulus to the slowing Chinese economy. This could not only slow the flow of sightseers but could also compound theslowing Australian housing market, particularly in light of stricter Chinese capital controls. The old adage "May we live in interesting times" has been granted in spades as a belated gift. We look forward to new investment opportunities in the year ahead.

THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECTAny Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. © 2015 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice or ‘class service’ have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").

Australian Shares Core Portfolio Quarterly Update December 2015

Core Portfolio - Complete List of Holdings

Portfolio Date: 31/12/2015

CodeStyle Box

EconomicMoat

FairValue

Uncertainty

PortfolioWeight

%

Australia and New Zealand Banking Group LtdWestpac Banking CorpVeda Group LtdNational Australia Bank LtdResMed Inc DRCash AccountBHP Billiton LtdQBE Insurance Group LtdPlatinum Asset Management LtdWesfarmers LtdWestfield CorpWoolworths LtdCSL LtdBrambles LtdCrown Resorts LtdTelstra Corp LtdComputershare LtdGoodman GroupTrade Me Group LtdAnsell LtdAlumina LtdIluka Resources LtdQube Holdings Ltd

ANZ Ç Wide Medium 8.2WBC Ç Wide Medium 7.6VED Ì Wide Medium 6.7NAB Ç Wide Medium 5.6RMD Ë Narrow Medium 5.6

5.4BHP È None High 5.2QBE È Narrow High 5.1PTM Ì Narrow Medium 4.6WES È Narrow Medium 4.5WFD É Narrow Medium 4.5

WOW Ç Narrow Medium 4.3CSL É Narrow Medium 3.7BXB É Wide Medium 3.3

CWN É Narrow High 3.3TLS È Narrow Medium 3.3CPU Ë Narrow Medium 3.2

GMG É Narrow Medium 3.1TME Ê Wide Medium 3.1ANN Ë Narrow Medium 2.7AWC Ì None Very High 2.6

ILU Ë Narrow High 2.5QUB Ë Narrow Medium 2.0

Holdings-Based Style Trail

Time Period: 31/01/2013 to 31/12/2015

Mic

roSm

all

Mid

Larg

eGi

ant

Deep-Val Core-Val Core Core-Grth High-Grth

Aust Shares - Core 31/01/2013 31/12/2015 S&P/ASX 200 TR 31/01/2013 31/12/2015

Holdings-Based Style Map

Mic

roSm

all

Mid

Larg

eGi

ant

Deep-Val Core-Val Core Core-Grth High-Grth

Aust Shares - Core 31/12/2015 S&P/ASX 200 TR 31/12/2015

Note dividends for Trade Me are imputed for New Zealand residents. Australian residents receive unfranked dividends with a supplementary payment.Morningstar Investment Committee members own the following securities held by the portfolio: AWC, BHP, NAB, QBE, STO, TLS, WES

The above chart shows the portfolio and index style mix. The shaded area is the region in which 75% of the portfolio's holdings fall.

The above chart shows the portfolio and index style mix over time, the smallest dot representing the earliest date.



Transactions in the Quarter

During the December quarter, there were three transactions in the Core Equity Portfolio. Qube Holdings was purchased, while Santos and our Westpac entitlements were sold. The net impact was a small reduction of our resources exposure and overall positive contribution to performance, particularly with Santos halving in price since.

Sold Westpac Banking Corporation entitlement rightsWestpac Banking Corporation raised equity to meet capital requirements related to various APRA requirements, including increased residential mortgage risk weights. Similar to peers, Westpac is working toward achieving "unquestionably strong" status to help ensure Australian financial system stability through the economic cycle. While the Westpac business was generally performing well and was undervalued according to Morningstar, we sold our rights on-market as we already have material exposure to the big four banks in our strategies.

Exited 3.1% position in SantosAs severe intrinsic value dilution either via discounted equity raisings or asset sales became probable, our analyst moved the Santos moat rating to none, increased the uncertainty rating to very high, and sharply reduced the fair value estimate, revealing a stock that has no place in the portfolio. Thus far the downside risks we feared when exiting the position have played out. Santos has limited control over its balance sheet at this stage and potential requirements for additional dilution are worrisome given its already leveraged position as oil prices have plummeted.

Initiated Qube Holdings position at 2%Later in the quarter, we used part of our cash balance to initiate a position in Qube Holdings. Qube has a narrow moat, medium uncertainty, and was trading at about a 20% discount to intrinsic value according to the Morningstar Equity Research analyst. We see great long-term potential for this company although also expect short-term pain in the next year or two as its resources facing earnings come under heavy pressure.

Qube's share price has fallen largely due to mining exposure, primarily via its Ports & Bulk division. While this business segment is generally more exposed to commodity volumes rather than prices, the particularlyacute and deep decline in iron ore, oil, and gas prices mean that marginal producers are no longer profitable, causing them to shutter production or negotiate lower transport costs, regardless eating into Qube's future cash flow. It's hard to say whether the resources bloodbath is complete. We suspect it isn’t but believe the downside is sufficiently priced into Qube's shares to take an initial stake.

More importantly, we buy into the long-term opportunity that Chairman Chris Corrigan has been pursuing for decades which is to improve the logistics of international trade with Australia. There are several projects in the pipeline but the largest is Moorebank which once completed will become Australia’s largest inland intermodal terminal. As long as international trade continues to rise (on average) over time, which seems a sure bet to us, then the services and infrastructure Qube offers, owns, or controls, will rise in value.

There has been extensive press on Qube's aggressive pursuit of Asciano's assets, namely the former Patrick Corporation that Corrigan and team built years ago. We're not overly fussed about the outcome as long as Qube management keep prudence in front of legacy and avoid an all-out bidding war. Depending on how this and other projects proceed, or how deep the commodities rout ultimately becomes, we can't rule out a discounted capital raise at some point. However, if the long-term outlook remains intact, we'll be happy to increase our stake, all else equal.

For more information about these companies or any portfolio holding, please read the Morningstar Equity Research reports.

Asset Allocation


%

Stock 94.6

Bond 0.0

Cash 5.4

Other 0.0

Total 100.0

Equity Country Exposure


%

Australia 90.9

New Zealand 3.2

United States 5.9

Total 100.0

Equity Sectors (GICS)


%

Materials 10.9

Industrials 12.8

Consumer Discretionary 6.7

Consumer Staples 9.3

Healthcare 12.7

Financials 40.8

Information Technology 3.4

Telecom Services 3.4

Total 100.0

Portfolio Fundamentals

Display Benchmark 1: S&P/ASX 200 TR

Inv Bmk1 Cat Avg

Average Market Cap (mil)

P/E Ratio (TTM)

Debt to Capital % (TTM)

ROA % (TTM)

ROE % (TTM)

24,077.9

16.0

40.0

4.8

15.3

21,796.8

16.2

40.1

5.0

15.6

12,732.8

17.0

33.4

8.3

16.8



Quarter Performance

The Core Portfolio rose 6.2% in the December quarter compared with a 6.5% increase for the benchmark, underperforming by 0.1%. Platinum, Crown, and Trade Me were the largest contributors while CBA, BHP,and Westfield were the largest detractors. From an industry perspective an underweight to energy contributed while an underweight to banks detracted.

Contributors:Platinum (overweight) outperformed nicely in the quarter. Capital requirements in the business are virtually nil with nearly all earnings paid as dividends leading to an attractive dividend yield. The stock has retreated in early 2016 with equity markets and probably due to its China exposure, but we're still fans of this business long term, particularly given that management smartly put on yuan hedges as devaluation becomes probable.

Crown (overweight) moved from detractor to contributor with increasing signs that James Packer, majority owner of the company, is likely to make a bid for some or all of its assets. This information helped to partly reverse what has been a tough year for the shares as the Macau business struggles with rapid declines in turnover following China corruption crackdowns. Lapping tough comparables in Macau or additional information regarding Packer's intentions could be near-term catalysts.

Trade Me (overweight) recovered from undue pessimism in the quarter, as a strong franchise, reasonable valuation and attractive yield brought demand for its shares. Now trading slightly above fair value, there's less upside potential remaining, but it is a good company that we're happy to hold.

Detractors:Commonwealth Bank of Australia (underweight) bounced in the quarter dragging up the market given its very large weight. We don't own Commonwealth Bank in the Core Equity Portfolio because of concerns that it is being priced at an abnormally large premium to peers, regulatory headwinds, mounting home price pressures, and because of our desire to demonstrate greater diversification than the benchmark which holds about 10% in Commonwealth Bank. We readily acknowledge Commonwealth Bank is the highest quality of the big four banks but its valuation seems to more than reflect this characteristic.

BHP Billiton (overweight) shares were hammered in the quarter. Falling commodity prices across the board, uncertainty around China growth and demand going forward, and the unfortunate Samarco disaster were a perfect storm for this former stalwart. While there is likely value in the shares, we're substantially less enthused given the material downgrades to fair value and moat ratings put through by the MorningstarEquity Research team.

Westfield (overweight) shares fell about 12% in the quarter. We continue to like the shares as a result of high quality properties and the diversification benefits for the portfolio from its offshore earnings.

Risk-Reward

Time Period: 1/08/2004 to 31/12/2015

Std Dev

0.0 3.0 6.0 9.0 12.0 15.0 18.0

0.0

2.0

4.0

6.0

8.0

10.0 Aust Shares - Core

S&P/ASX 200 TR

Retu

rn

Aust Shares - Core - Market Performance

Time Period: 1/08/2004 to 31/12/2015

Inv Bmk1

Up Period Percent

Down Period Percent

Best Month

Worst Month

Best Quarter

Worst Quarter

Up Capture Ratio

Down Capture Ratio

62.04 63.50

37.96 36.50

9.19 7.98

-12.66 -12.61

23.45

-15.94

21.50

-18.25

100.00

97.21

96.64

100.00

Risk

Time Period: 1/08/2004 to 31/12/2015

Inv Bmk1

Return % pa

Std Dev

Downside Deviation

Alpha

Beta

R2

Sharpe Ratio (arith)

Tracking Error

8.30

13.74

8.18

13.95

0.00

0.00

3.68

5.08

1.00

0.00

100.00

0.26

0.15

0.95

87.01

0.25

Performance Relative to Peer Group (one month lag)

Peer Group (5-95%): All Managed Investments - Australia - Equity Australia Large Blend

Top Quartile 2nd Quartile 3rd Quartile Bottom Quartile

-6.0-4.0-2.00.02.0

YTD 1 year 3 years 5 years Since inception

4.06.08.010.012.014.0


Retu

rn



Sector and Industry Weightings Analysis

Our transactions in the quarter leave the portfolio with no direct energy exposure (exited Santos) and a mildly larger industrials allocation (added Qube).

Health care is still our largest sector overweight position, driven by ResMed, CSL, and Ansell. The health-care weighting is meant to leverage the themes of increasing wealth, standards of living, and longevity, as well as the steadily ageing population.

The consumer staples sector is another overweight position due to Woolworths and Wesfarmers. We have high confidence in the competitive advantages of Wesfarmers. The unfortunate state Woolworths finds itself in can partly be attributed to its own severe missteps but Wesfarmers management deserves a good chunk of credit for its exceptional execution. We're not expecting a turnaround in the short term at Woolworth’s, but given valuation, we think it's worth holding on a long-term view.

Our largest sector underweight position is to financials, reflecting an underweight in banks, although our exposure to the "big four" is still large in absolute terms. In the last year or so, we increased the diversification of our financials holding, away from banks, with the addition of Platinum Asset Management and an increased weighting to Veda Group, the latter set to be acquired shortly. These complement holdings in Westfield Corporation, Goodman Group and QBE Insurance Group. Our property exposures of WestfieldCorporation and Goodman Group are more growth-orientated and global facing. Both bring internationalexposure and benefit from a falling Australian dollar.

GICS Industry Group Weights Relative to Benchmark

Commercial Services and Supplies

Health Care Equipment and Services

Food and Staples Retailing

Software and Services

Retailing

Consumer Services

Diversified Financials

Automobiles and Components

Pharmaceuticals and Biotechnology

Consumer Durables and Apparel

Insurance

Household and Personal Products

Capital Goods

Real Estate

Media

Food, Beverage and Tobacco

Materials

Telecommunication Services

Utilities

Transportation

Energy

Banks

-14.0-12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0

7.2

5.3

3.1

2.4

2.2

0.4

0.3

-0.1

-0.1

-0.1

-0.1

-0.2

-0.3

-0.7

-0.8

-1.1

-1.7

-2.2

-2.3

-2.8

-4.0

-9.7

GICS Sector Weights Relative to Benchmark6.7

4.7

9.27.1

0.04.0

41.348.8

13.16.9

12.87.8

10.112.0

3.30.9

3.45.5

0.02.3

0.0 10.0 20.0 30.0 40.0 50.0 60.0

Consumer Discretionary

Consumer Staples

Energy

Financials

Healthcare

Industrials

Materials

Technology

Telecom Services

Utilities




Selection Effects

Time Period: 1/10/2015 to 31/12/2015

Underperform Outperform

Overweight

Underw

eightRe

lativ

e W

eigh

t

Relative Return

12.00

6.00

0.00

-6.00

-12.00

-75.00 -60.00 -45.00 -30.00 -15.00 0.00 15.00 30.00 45.00 60.00 75.00

1514

13121110

9

8

76

543

2

1

15

141312

1110987

6 5

4

3 21

Best Selections Investment Type Weight +/- Return +/- Effect

1 Platinum Asset Manageme... Stock 4.46 12.37 0.52

2 Crown Resorts Ltd Stock 2.84 19.28 0.50

3 Trade Me Group Ltd Stock 3.04 10.04 0.31

4 Rio Tinto Ltd Stock -1.54 -14.98 0.24

5 Brambles Ltd Stock 2.06 11.81 0.24

6 Ansell Ltd Stock 2.58 7.31 0.18

7 South32 Ltd Stock -0.53 -28.96 0.16

8 Aurizon Holdings Ltd Stock -0.83 -19.55 0.16

9 Origin Energy Ltd Stock -0.63 -18.90 0.13

10 Woodside Petroleum Ltd Stock -1.55 -7.71 0.12

11 Telstra Corp Ltd Stock -1.54 -6.98 0.12

12 Spotless Group Holdings Ltd Stock -0.16 -56.75 0.10

13 Medibank Private Ltd Stock -0.48 -18.14 0.09

14 Suncorp Group Ltd Stock -1.23 -7.39 0.09

15 Computershare Ltd Stock 2.93 2.75 0.09

Worst Selections Investment Type Weight +/- Return +/- Effect

1 Commonwealth Bank of Au... Stock -9.82 10.64 -1.02

2 BHP Billiton Ltd Stock 1.62 -26.60 -0.50

3 Westfield Corp Stock 3.71 -11.59 -0.44

4 QBE Insurance Group Ltd Stock 4.32 -9.31 -0.42

5 ResMed Inc CDR Stock 5.99 -4.64 -0.27

6 Iluka Resources Ltd Stock 2.49 -8.27 -0.23

7 Woolworths Ltd Stock 2.33 -8.35 -0.20

8 Veda Group Ltd Stock 6.92 -2.11 -0.12

9 Alumina Ltd Stock 2.59 -4.31 -0.11

10 Caltex Australia Ltd Stock -0.66 13.54 -0.09

11 Asciano Ltd Stock -0.62 12.27 -0.08

12 Treasury Wine Estates Ltd Stock -0.38 21.78 -0.08

13 Domino's Pizza Enterprises ... Stock -0.22 36.53 -0.07

14 Insurance Australia Group Ltd Stock -0.98 7.90 -0.07

15 Macquarie Group Ltd Stock -2.04 3.51 -0.07

Returns Relative to Benchmark

As of Date: 31/12/2015

3 month YTD 1 year 3 years 5 years Since inception (29/07/2004)-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

6.2

-1.8 -1.8

5.8 6.17.5

6.5

2.6 2.6

9.2

7.08.3


Retu

rn

Performance measures are expressed net of fees, gross of costs and taxes are deducted. Dividends are reinvested in the portfolio. The performance displayed is for the Australian Shares Core Portfolio and represents modelled performance only. This performance will differ from actual performance depending on factors such as transaction timing and any divergence from constituent weightings.* Where inception date is not the beginning of a month, returns are calculated using a start date which is the first day of the month following inception.



Cumulative Attribution Effects

Time Period: 1/02/2015 to 31/01/2016

GICS Industry GroupCumulative Attribution Effects

Cumulative Allocation EffectCumulative Selection EffectCumulative Active Return

Attribution EffectsAllocation EffectSelection EffectActive Return

Attribution Effect %8.00

6.00

4.00

2.00

0.00

-2.00

-4.00

2.00

1.00

0.00

-1.00

2-28-2015 3-31-2015 4-30-2015 5-31-2015 6-30-2015 7-31-2015 8-31-2015 9-30-2015 10-31-2015 11-30-2015 12-31-2015 1-31-2016

Allocation Effects

Time Period: 1/10/2015 to 31/12/2015

Underperform Outperform Overweight

Underw

eightRe

lativ

e W

eigh

t

Relative Return

9.00

4.50

0.00

-4.50

-9.00

-30.00 -24.00 -18.00 -12.00 -6.00 0.00 6.00 12.00 18.00 24.00 30.00

5

43

2

1

5

4

3

2

1

Best Weighting Weight +/- Return +/- Effect1 Energy -3.47 -7.39 0.342 Software and Services 2.58 5.42 0.163 Commercial Services and Supplies 7.68 2.18 0.164 Materials -1.13 -14.34 0.155 Telecommunication Services -2.08 -6.26 0.14

Worst Weighting Weight +/- Return +/- Effect1 Banks -7.53 6.85 -0.522 Food and Staples Retailing 3.59 -3.36 -0.123 Food, Beverage and Tobacco -1.06 5.36 -0.064 Household and Personal Products -0.21 25.09 -0.055 Transportation -4.30 0.28 -0.04



Equity Sectors (GICS)

Time Period: 1/01/2013 to 31/12/2015

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

06/2013 12/2013 06/2014 12/2014 06/2015 12/2015

Energy % Materials % Industrials %Consumer Discretionary % Consumer Staples % Healthcare %Financials % Information Technology % Telecom Services %Utilities %

Equity Style Valuation

Time Period: 1/01/2013 to 31/12/2015

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

06/2013 12/2013 06/2014 12/2014 06/2015 12/2015

Value % Core % Growth %

Equity Market Capitalization

Time Period: 1/01/2013 to 31/12/2015

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

06/2013 12/2013 06/2014 12/2014 06/2015 12/2015

Giant % Large % Mid %Small % Micro %



Portfolio Mandate and Typical PositioningInvestment Methodology and Process

Core Portfolio StrategyThe Australian Shares Core Portfolio is an actively managed concentrated portfolio consisting of our best ideas in the S&P/ASX 200 Index. The portfolio is constructed with a focus on long-term fundamental value and bias toward businesses with sustainable competitive advantages (economic moats) and predictable cashflows.

Total return from the Core Portfolio will tend to be driven by both capital appreciation and dividend yield with the mix dependent on the opportunities available. Core holdings may overlap with our Income, Growth, and Sustainable Portfolios with the style bias driven by the relative value offered by market prices. Investors in the Core Portfolio simplify their investment decision process by outsourcing the style tilt to Morningstar. Relative value is largely determined by comparing prevailing stock prices to our research team’s price/fair value estimates. The Core Portfolio has a strong bias toward companies with an economic moat and more predictable cash flows (lower uncertainty). This approach helps ensure preservation of capital, low turnover, and reduced volatility while pursuing excess returns.

Investment Strategy Committee ProcessThe equity portfolios are managed by their portfolio managers and our eight-person investment strategy committee which comprises selected members of the equities research team. Committee meetings reinforce rigor and consistency of research methodology through collaborative debate on proposed and existing holdings. A constant feedback loop between Morningstar’s research team and investment committee members leverages team strengths in vetting stock calls and portfolio holdings. This constant cycle strengthens team culture, expertise and ratings, minimising key-person risk and common behavioural pitfalls.

The committee is experienced and well-resourced, ensuring stability and succession planning. Representation from each sector team ensures cross-market expertise. Committee members have average industry experience of 17 years and average tenure with Morningstar of 10 years. We are not averse to an occasional portfolio manager change, as the driving forces behind our portfolio construction process are our bottom-up research and investment committee overlay.

In-depth research by our large, global, and experienced analyst team is the bedrock of our portfolio management process and facilitates our high conviction investments. We have more than 100 equity andcredit analysts globally, covering around 1,700 stocks and 700 debt issuers, making us one of the largest independent research teams in the world. Our 20 Australian and New Zealand-based analysts cover about 230 Australian and New Zealand stocks which includes extensive research reports, timely event analysis, actionable special reports, and deep discounted cash flow modelling on every company. This is complimented by our local credit research to help us assess the complete capital structure and preserve capital while pursing upside opportunities.

Investment Committee Feedback Loop








This document is issued by Ibbotson Associates Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Ibbotson’). Ibbotson is a member of the Morningstar group of

companies (‘Morningstar’). © 2015 Morningstar, Inc. All rights reserved. In compiling this document, Ibbotson has relied on information and data supplied by Morningstar and other

third party information providers. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Ibbotson, Morningstar nor their third party

information providers 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.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. Past performance is not a reliable

indicator of future performance. Neither Ibbotson nor Morningstar guarantees the performance of any investment or the return of capital. The information provided is general advice only

has been prepared without reference to an individual person’s objectives, financial situation or particular needs. You should consider the advice in light of these matters and if

applicable the relevant disclosure document before making any decision to invest. To obtain advice tailored to your situation, individuals should contact a professional financial adviser.

For a copy of the relevant disclosure document, please contact our Distribution Team on 02 9276 4550. Some material is copyright and published under licence from ASX Operations

Pty Ltd ACN 004 523 782.

Portfolio Overview An actively managed portfolio of Australian equities, with a focus on companies with economic moats that are trading at

relatively attractive valuations.

Sector Specialist Managed Accounts

Asset Allocation Return Objective Time Horizon Risk Profile

Growth

Assets %

Defensive

Assets %

Australian Shares

Core

S&P/ASX 200 Accumulation Index 7 years High 100 0

Australian Shares

High Yield

S&P/ASX 200 Accumulation Index 7 years High 100 0

Australian Shares

Small Cap

S&P/ASX Small Ordinaries Accumulation Index 7 years Very high 100 0

Property

S&P/ASX 200 REITs Accumulation Index 5 years High 100 0

Global Shares MSCI ACWI Accumulation Index

(Net Dividends Reinvested)

7 years High 100 0

Cash

Bloomberg Australian Bond Bill Index 2 years Very low 0 100

This document is issued by Ibbotson Associates Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Ibbotson’). Ibbotson is a member of the Morningstar group of

companies (‘Morningstar’). © 2015 Morningstar, Inc. All rights reserved. In compiling this document, Ibbotson has relied on information and data supplied by Morningstar and other

third party information providers. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Ibbotson, Morningstar nor their third party

information providers 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.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar or your adviser. Past performance is not a reliable

indicator of future performance. Neither Ibbotson nor Morningstar guarantees the performance of any investment or the return of capital. The information provided is general advice only

has been prepared without reference to an individual person’s objectives, financial situation or particular needs. You should consider the advice in light of these matters and if

applicable the relevant disclosure document before making any decision to invest. To obtain advice tailored to your situation, individuals should contact a professional financial adviser.

For a copy of the relevant disclosure document, please contact our Distribution Team on 02 9276 4550. Some material is copyright and published under licence from ASX Operations

Pty Ltd ACN 004 523 782.

Diversified Managed Accounts

Asset Allocation Return Objective Time Horizon Risk Profile

Growth

Assets %

Defensive

Assets %

Defensive

CPI+ 0.75% Rolling 1 year Low 15 85

Conservative

CPI+ 1.0% Rolling 3 years Low to Medium 30 70

Balanced

CPI+ 2.5% Rolling 5 years Medium 50 50

Growth

CPI+ 3.5% Rolling 7 years Medium to High 70 30

High Growth

CPI+ 4.5% Rolling 9 years High 85 15

High Growth Plus

CPI+ 5.0% Rolling 10 years High 95 5

Diversified Income

CPI+ 2.0% Rolling 4 years Medium 40 60

Documents

Australian Shares Core Portfoliomorningstarinvestments.com.au/wp-content/uploads/... · Australian Shares Core Portfolio Quarterly Update December 2015 Transactions in the Quarter