Researcher-approved funds to explore over the next 5 years

Portfolio trends are shifting. No longer can investors and advisers think about asset allocation as a simplistic framework of equities and bonds that span purely broad domestic, international, and emerging markets. 

As investment trends evolve or accelerate on the back of COVID-19, Australia’s top researchers believe that diversification needs to be approached in an increasingly nuanced and granular manner. For Zenith’s David Wright, this means incorporating emerging approaches to investing such as ESG (environmental, social, and corporate governance), a style of investing that some fund shops believe will garner more than U$1 trillion in assets by 2030.

Another is the re-emergence of value investing, says Aman Ramrakha, while Lonsec’s Peter Green believes Asia’s booming middle-class and structural disruptive drivers such as technology and automation companies will continue to underpin long-term returns.

In this installment of Livewire’s Top-Rated Funds Series, the researchers flesh out their views on the big themes that should matter to your portfolio mix and list out their preferred managers who are capitalising on the next wave of investment opportunities.

The researchers sharing their wisdom and manager picks are:

• David Wright, Zenith Investment Partners
• Aman Ramrakha, Morningstar
• Peter Green, Lonsec

You can watch the video by clicking the player or read an edited transcript below. Enjoy!

Edited Transcript

Ally Selby: What are some investment themes or ideas that you think will be really important to invest as portfolio returns over the next five years?

Zenith's megatrend pick - ESG

David Wright, Zenith

The whole ESG space is one to look at. Again, that's not terribly unique. It's been around for a number of years, but in our experience in the last 6-12 months, that momentum has shifted enormously to the extent that there is much more focus, both by investors, advisers, and fund managers, and what they're doing from an ESG assessment and practices perspective.

We've already seen examples of companies that are following, let's say, good environmental practices and being bid up. They've really performed very well from a share price perspective because they're seen as ESG type leaders to the opposite extreme of where I guess corporates who have done things that haven't been socially acceptable have been really punished by the market.

I do think that plays out pretty strongly from here on in, and certainly in the timeframe you're talking about being the next five years. That's a big one I think that has big implications for how money's both managed and invested.

Morningstar's megatrend picks - ESG & value stocks

Aman Ramrakha, Morningstar

One of the themes is ESG. Certainly the shift to focusing on ESG as part of your investment is coming off a low base, but it is growing and we're seeing more and more managers responding to that bottom-up demand and thinking about what it means for the processes and products sets that they have out in the marketplace. 

The other piece of the puzzle is very much on this 'value versus growth' piece. We've seen value come back hard. I think that's an area where we're starting to watch what that means for portfolio construction, so to speak.

Lonsec's megatrend picks - Disruption & Asia's booming middle class

Peter Green, Lonsec

I still think some of these structural disruptive drivers if you wish are going to be driving longer-term returns. I mean, I look at digitalisation and automation as being, if you wish, that fourth industrial revolution, I think it's been called. I see that as a structural change.

You look from a bottom-up perspective about what these companies are doing, and they're investing in automation and digitalisation. I think the technology - and I'm not a computer expert - but the technology has got to the point where supercomputing can mean a lot of data, can compute it in the light. I don't see that going away. I genuinely believe that is a structural driver.

The other one that I think once again, it's that the rise of the middle-class in Asia and in the emerging markets, but especially in Asia. I once again see that as a big long-term structural driver of returns. It just means that the industrial top companies in those markets do better than the local developed market where we don't have that sort of drivers. Those are the two things I still think are genuine long-term structural drivers and will be of portfolio returns.

Researchers' top manager choices

Lonsec backs growth funds

James Marlay: Are you able to give me some examples of funds that have been through your research process that provides access to those longer-term thematics you've just discussed?

Peter Green: Yeah, sure. I mean, in terms of the automation, digitalisation, tends to be the domain of the growth manager, and especially the high-growth managers. Now they've had a big correction of late and that's short-term. Valuations have been pretty high - it was natural then that valuation, as we get some difference of narratives and market views, starts to come off.

But I think that high growth manager, and I'll give you some examples, such as like a Hyperion or Bennelong in an Australian equity context or in a global equity context, like a Baillie Gifford. Also, Hyperion has got a global equity strategy there now. 

Managed Fund

Bennelong Australian Equities Fund

Australian Shares

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Managed Fund

Hyperion Australian Growth Companies Fund

Australian Shares

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Those managers can really tap into the type of companies that can really drive that disruptive, innovative curve from Asian exposure. Within Asian strategies, we've got passive options. We've got the BetaShares Asia Technology Tigers ETF (ASX:ASIA), which invests in Asia's tech all-stars.

James Marlay: Is it an ETF?

Peter Green: Yes - you just get some of these Asian strategies out there, like a GQG Partners and those strategies who actually take an active approach and pick stocks and the like. There's lots of optionality for people who'd like to take on those thematics and hopefully benefit them as they play out over time.

Managed Fund

GQG Partners Global Equity Fund

Global Shares

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Morningstar seeks managers with 'ESG commitment'

Aman Ramrakha: We recently started to rate fund managers along what we call an ESG commitment level. What we're finding is that compared to global counterparts, particularly European counterparts, the fund management industry in Australia is in the early stages of deep adaptation of ESG. Now, to be fair, in Europe, a lot of it's being driven by legislation. Here, it's much more about, I guess, an iterative process or bottom-up demand.

James Marlay: It's a very generous way of saying we're behind.

Aman Ramrakha: Yes we are. Certainly from the managers that we've rated so far, which is only a very small cohort of our overall coverage, some of the international strategies, funds like Australian Ethical, we recently gave the highest ranking to.

Then we have Affirmative Investment Management, which is a fixed income manager in the green bond space. They're two managers that have taken out our highest commitment level, so they're leading there. But what it demonstrates is that if they'd been doing it for a while, they have a very established process. They have a higher chance of getting better ranked in our commitment level.

What we're seeing is a lot of managers starting to build out their ESG functionality, whether it's bringing people in, whether it's enhancing their processes, that's still occurring. We anticipate that they'll catch up at some point.

Zenith backs managers with dedicated ESG teams

David Wright: Well, I think here in the Australian market, let's face it, Pendal's been probably at the forefront of that, having a dedicated ESG business that they acquired within the group, then you've got managers like Impax which is now coming into the Fidante suite.

You've got PIMCO, obviously, the largest global bond manager in the world, having a global ESG bond fund, but also, it's been quite a specialist field. You've seen some of the smaller managers evolve and be really successful in acquiring funds and interest from investors.

Managed Fund

PIMCO ESG Global Bond Fund

Global Fixed Income

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Australia's 100 top-rated funds

Livewire's Top-Rated Fund Series gives subscribers exclusive access to data and insights that will help them make more informed decisions. Click here to view the dedicated website, which includes:

• The full list of Australia’s 100 top-rated funds.
• Detailed fund profile pages, with data powered by Morningstar.
• Exclusive interviews with expert researchers from Lonsec, Morningstar and Zenith.
• Videos and articles featuring 16 top-rated fund managers.