Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 325

Welcome to Firstlinks Edition 325

  •   25 September 2019

A few days ago, Bloomberg Markets reported the 'end of an era' and an 'epic shift' which has not been widely reported in Australia. Bloomberg called it a major turning point in history.

"In August, the investment industry reached one of the biggest milestones in its modern history."

For the first time ever in the US, index-based equity funds (including ETFs) exceeded actively-managed equity funds. The threshold was that, according to Morningstar estimates, inflows into passive US equity funds in the year to August 2019 were US$89 billion (to US$4.27 trillion) versus active outflows of US$124 billion (to US$4.26 trillion).

The momentum is irreversible. Although ETFs in Australia are growing strongly, they still account for only 2.5% of assets under management here, where managed funds dominate. There's a lot of contestable space. Research issued by Investment Trends this week reveals:

"When asked what proportion of total client investments they would prefer to allocate to passive investments over actively-managed investments, the average planner now prefers to allocate 33% of client portfolios into index-tracking investments, up significantly from 19% in 2018." 

The man who started index investing was Vanguard's Jack Bogle, who died in January 2019 at the age of 89. As Warren Buffett said in his Berkshire Hathaway letter of 2016:

"If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing of added value.

In his early years, Jack was frequently mocked by the investment management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me."

At this historical moment, it's timely to interview the Managing Director of Vanguard Australia, Frank Kolimago, who previously ran Vanguard's Personal Advisor Services (PAS). He explains Bogle's philosophies and shows how personal advice can be delivered to the masses.

Treading a fine line on China 

Our 'Man of Titanium', Scott Morrison, must maintain good relationships with both Australia's major trading alliance, China, and major strategic defense alliance, the US. The Prime Minister supported Donald Trump's push for concessions from China on trade, even after the President said it would take more than a year to resolve the trade war. The framing is a delicate balance.

"It's got to be a sustainable outcome ... You need to understand Australia's economic relationship with China is very different from the United States' economic relationship with China ... We have a surplus with China, they have a deficit ... It has been an absolute boon for Australia and that is why I have always made it clear we have always welcomed China's economic growth."

So while Morrison backs Trump's hardline on trade, he needs to avoid irritating China. Treasurer Josh Frydenberg boasted of a Budget close-to-balanced, but it would be a bleak picture without Asia. As shown below, two-way trade with China is over three times larger than with the US.

Source: Deloitte Access Economics for 2017/2018

Bill Evans gives his latest predictions

The Australian Financial Review recently said of Westpac's Bill Evans' ability to predict the trajectory of official interest rates:

"This reputation means there is nobody outside the Reserve Bank who can move markets the way Westpac's veteran Chief Economist can."

Many moons ago, Bill and I worked at adjacent desks at CBA, long before it was a listed company, and Bill was as competitive on the squash court as he is today on correctly predicting markets. It's great to share his latest views on financial markets and interest rates.

Other investment articles ...

Also in this bumper edition, Vihari Ross explains the search for the best quality companies, eskewing any concept of chasing 'turnaround' or 'recovery' stories. Ben Inker reinforces similar ideas by showing how the biggest and best giant companies have prospered in recent years. The investment question is whether their success will continue.

Two articles take a look at mining and other commodities vital to Australia's success. Michael Salvatico offers a counterintuitive view that most mining is good for climate change, while David Bassanese shows how to invest in commodities and their role in a balance portfolio. With climate change headlining the news this week, it's worth noting Australia is installing renewable energy faster (in watts per person per year) than any other country in the world.

Jonathan Rochford's monthly look at Media Worth Consuming unveils dozens of links to sources outside mainstream coverage, often sceptical, quirky and challenging consensus.

The White Paper from Shane Oliver of AMP Capital is an excellent summary of recent market performance, but more important, gives his forecasts for medium-term returns by asset class. He describes five implications for investors relevant to portfolio construction.

Next week, we will take a break from preparing new material to allow our team to recharge their batteries after a non-stop 2019, including copying thousands of articles to our new website. To showcase this content, we will select some all-time favourites you may have missed.


Graham Hand, Managing Editor

For a PDF version of this week’s newsletter articles, click here.



Most viewed in recent weeks

Baseline outlook for economic recovery is too optimistic

We cannot throw our hands up in the air and say 'this time around, it's simply too hard'. Having no macro view is unhelpful, but many of the baseline scenarios are overly optimistic, says the former CEO of Westpac and now Chairman of Chi-X Australia.

10 undervalued stocks if you're worried about volatility

Amid the coronavirus-induced turmoil, many quality names are trading at a discount to fair value, according to Morningstar analysts. A smaller list of companies also screen for earnings certainty.

Will our government embrace these three reforms?

COVID-19 is an opportunity for a crucial policy reset, but what does that really mean? Business is hoping for three big reforms, but there are massive barriers to be overcome.

Welcome to Firstlinks Edition 357

There is a remarkable concentration similarity between the Australian and US stock markets that has delivered poor results for Australians and great results for Americans (and global investors). As the share prices of five Australian banks have tanked, the prices of five US technology companies have surged. Each group now represents 20% of their respective indexes, but the journey has been a disaster for many Australians.

  • 13 May 2020

Don't invest just for yield: the smarter way to generate income

Investors often overlook the capital risk in high-yielding stocks. It's better to ensure capital grows and investors can sell a portion each year to make up for the shortfall in income from dividends.

8 reasons business has little to learn from 'The Last Dance'

Everyone seems to be watching The Last Dance, a fascinating sports documentary about the pursuit of excellence by one of the greatest athletes of all time. Let's not stretch the business analogy too far.

Latest Updates


The most amazing investing lesson of all

If you had to choose one concept to explain to a young person setting out on an investment journey, it should be compounding. While the results are not as spectacular, it's especially relevant when returns are lower.


What will stop the market returning to its highs?

Despite signs of optimism, market valuations are stretched and recovery is fuelled by government support. Some companies are doing well but stimulus cannot continue to prop up consumers for too long.


Value is under pressure again - but its day will come

The key to investment success from here is the ability to ignore the crowd and the hot stocks. We will then face a once-in-a-lifetime chance to buy cyclical and industrial stocks with significant upside.

Investment strategies

10 undervalued stocks if you're worried about volatility

Amid the coronavirus-induced turmoil, many quality names are trading at a discount to fair value, according to Morningstar analysts. A smaller list of companies also screen for earnings certainty.


6 questions SMSF trustees are asking about gold

SMSF trustees are concerned about stock market volatility and low interest rates, and they asked six important questions during this seminar on whether gold has a role in their portfolios.

Exchange traded products

LIC fees banned but other doors remain open

Treasury has finally banned commissions paid to brokers and advisers on LICs and LITs but the exemption from FoFA rules remains for other listed products in the 'real' economy, whatever that is.

SMSF strategies

Is it the end of cash for SMSFs?

The simple message to diversify is not new, but thousands of SMSF trustees focus only on equities and dividends. COVID-19 is encouraging SMSFs to consider different investment strategies.


Depression or recovery? The risk of time

It is always easier to see the challenges and risks while underestimating ingenuity and positive possibilities. It's likely to be the case this time, too, as long as we move quickly to open economies.



© 2020 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.