Morningstar launches active international equity ETF on ASX

Nov 12th, 2019 | By | Category: Equities

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Morningstar has ventured into the ETF issuance business via its Australian investment management concern with the launch of the Morningstar International Shares Active ETF (MSTR AU) on the Australian Securities Exchange (ASX).

Morningstar launches active international equity ETF on ASX

Morningstar has ventured into the ETF issuance business via its Australian investment management concern, Morningstar Investment Management Australia.

The ETF, which is actively managed and currency-hedged, comes with a management fee of 0.39% and aims to achieve meaningful capital growth over the medium to long term while minimizing the risk of permanent capital loss.

To achieve this aim, the fund’s managers construct a diversified portfolio of companies listed internationally across developed (ex Australia) and emerging markets that they believe exhibit desirable fundamental quality and/or value characteristics, supplemented by a passive currency overlay hedging the fund’s foreign currency exposure versus the Australian dollar.

Morningstar says the fund is designed for investors who seek additional diversification with the potential for capital growth and suggests a minimum holding period of five years.

For performance measurement purposes, the fund is benchmarked to the MSCI All Country World ex Australia Index with Net Dividends Reinvested ($A Hedged).

The strategy

Whilst the exact details of the underlying investment strategy have not been disclosed, Morningstar outlined the contours of the approach in a media release trailing its launch.

“We’re fundamental, valuation-driven investors who focus on quality companies and invest for the long-term. We look under the hood. We take time to understand what drives performance to identify those companies with a sustainable advantage, as we believe quality companies tend to reward investors over the longer term”, it noted.

It continued, “We are attracted to companies that perform a role that cannot be easily dislodged or replicated, such as the production of a component that’s crucial to a whole product.”

The comments suggest that the investment approach underpinning the fund is heavily guided by Morningstar’s proprietary economic moat framework, which seeks out companies with strong and sustainable competitive advantages.

The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. Some of the attributes that can give a company an economic moat include network effects, intangible assets, cost advantages, switching costs and efficient scale.

Morningstar offers up the examples of Shin-Etsu Chemical Company and Tokyo Ohka Kogyo (TOK) as companies it likes. It describes them as niche operators with powerful market positions, specializing in obscure materials (semiconductor silicon in the case of Shin-Etsu; photoresists in the case of TOK) that have become essential to growing industries. Apple uses their wares in iPhones, Dell in their laptops, Samsung in their full range.

Interestingly, despite Morningstar’s growing credentials in the sustainability ratings space, the fund’s managers do not explicitly take into account environmental, social, and governance (ESG) criteria into consideration when making investment decisions for the fund or when selecting, retaining or realizing investments.

Peers

On first screen, the fund appears to be the only international ex-Australia equity ETF listed on ASX to invest in both developed and emerging market stocks.

The existing ETFs in this segment, namely the BetaShares Global Quality Leaders ETF (QLTY AU), the SPDR S&P World ex Australia ETF (WXOZ AU) and the Vanguard International Shares Index ETF (VGS AU), are all linked to indices that include only developed market stocks (iStoxx MUTB Global ex-Australia Quality Leaders Index, S&P Developed Ex-Australia LargeMidCap and MSCI World ex-Australia Index respectively).

Price-wise, the fund is positioned on the high side, although Morningstar would likely argue that this reflects the fund’s actively managed approach and its foray into emerging market stocks.

The BetaShares and SPDR products charge annual management fees of 0.35%, while the Vanguard ETF comes in at 0.18%.

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