Morningstar Magazine - October/November 2017 - 33

below-average Morningstar Sustainability
Ratings have also had higher valuations than the
broad market.
A look at the sector allocations across our
positively rated funds offers some explanation. At
last count, 4- and 5-globe funds have a
higher allocation to the consumer defensive and
healthcare sectors, which are among the most
expensive sectors on a global basis. BNY
Mellon Long-Term Global Equity and Bronze-rated
Maj Invest Global Value Equities belong to
this group.
In contrast, they have had less exposure overall
to the cheaper financials sector than their
peers with lower sustainability ratings. Here, too,
there are exceptions: Gold-rated Kempen
Global High Dividend and Bronze-rated Tweedy,
Browne Global High Dividend Value held 4-globe
ratings at last count, although their allocations
to the financial sector are large.
Funds with 1- and 2-globe ratings have also tended
to have a high weighting in cheaper financials.
However, their relatively large allocation to U.S.
stocks raises their overall portfolio valuation.
European companies, which on average have a
valuation discount compared with their U.S.
counterparts, played a lesser role in the portfolios
of Medalists with 1- and 2-globe ratings.
Within the market-cap spectrum, Medalists
with 5 globes tended to invest a larger part of their
portfolios in companies within the giantand large-cap buckets. As larger companies tend
to perform better on sustainability measures,
this bias toward the high end of the marketcap spectrum is likely one of the drivers behind the
highest Sustainability Rating. Funds with
fewer globes tend, on average, to have lower
average market caps.
Natalia Wolfstetter is a director with Morningstar manager
research based in Germany.

Unpacking Fund Fees
and Charges in New
Transparency Push
AUSTRALIA h NEW ZEALAND

Australia

The term transparency is an increasingly popular
part of the language used by modern financial
services organizations, regulators, and
governments. Anecdotally at least, this has been
largely driven by the global financial crisis
and the intrinsic role opaque financial instruments
and structures played within this.
In Australia, the introduction of the federal Future
of Financial Advice reforms is the latest
regulatory response in this regard, though it
is by no means the first. It was preceded in 2002
by the Financial Services Reform Act and
associated legislation, which changed the way
consumers interact with the providers of financial
services and their products.
Regulatory Guide 97 is the Australian Securities
and Investments Commission's latest compliance
response to fees and cost disclosures. It was
set to come into effect on Oct. 1. It outlines how
product issuers-including banks, insurers,
and other financial companies-need to report
fees and costs to their clients.
While it has received a mixed reaction from
different industry groups, there has been
an extended consultation period, and Morningstar
has been directly involved in the discussions.

He emphasizes these aren't necessarily new costs,
but also reflect other expenses that weren't
previously clearly identified for investors.
Morningstar is collecting detailed fee data on the
products in its database. This data will be
used to develop investor-centric reports on fees
and charges for various sectors and types of
investment products.
Morningstar will also provide the data to
investment platforms, which in turn can pass on
clearer information to their clients, including end
investors, and meet their regulatory obligations
under RG97. Morningstar's approach to analyzing
fees is both backward- and forward-looking,
reflecting the actual and projected performance of
products after costs are considered.
Morningstar's collection of this fee data will be
finalized by Dec. 1. The next step involves
working closely with product teams, both here
in Australia and globally, to incorporate the
new fee data. A detailed timeline for this delivery
process will be made public soon.
While RG97 is unique to Australia, it is part of a
long-term push for greater transparency across
the global financial services industry. Regulations
with similar aims exist in the United States
and Europe, where Morningstar has also adopted
an active approach to these initiatives.
Morningstar is working on other transparency
initiatives in Australia, including improving portfolio holdings disclosure. The aim is to progress
beyond the current standard of releasing only the
top 10 holdings, to full portfolio disclosure.
Glenn Freeman is a senior editor at Morningstar in Australia.

"We see this as something very positive for individual investors," says Graham Dixon,
Morningstar's head of data and retirement
products, Australia and New Zealand.
"While you may see a slight increase in the fees
outlined in managed fund product disclosure
statements and other product communications
in response to the additional compliance
burden managers are taking on, it's introducing
even more transparency, which can only
be a good thing."

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Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017