Morningstar Guide to Selecting Investments

At Morningstar we are proponents of the investor, and not the investment. This guide focuses on finding the right vehicles for you to achieve your goals, understanding which products and styles suit your objectives. If you have not set your goals yet, our Guide to Portfolio Construction will give you the requisite foundations to find the right assets for those goals.

Structuring your portfolio with the best vehicles to reach your goals often means considering more than one asset class, product or investment style. More products can, however, bring other considerations. How do I access them? What sort of upkeep will it entail? How much tax will I pay? If it’s this complex, why bother? And sure, you can invest in something because you’re familiar with it, but does this ensure it will achieve your goals? I am no stranger to this. During my time working at an asset manager my whole portfolio was in managed funds by the time I moved on to another job. I knew the product; I understood its intricacies and it suited my pay cheque-to-pay cheque approach to investing. And I saved on transaction costs. But once I sat down to understand whether these funds would help me achieve my goals, a different picture emerged. These funds may have had different names but many of them were investing in the same things. If I was to reach my goals I knew I needed to restructure and diversify my portfolio.

This guide will help you navigate your choices, and show you how to weigh up different asset classes and styles of investing to ensure you’re heading in the right direction.

Start with an Investment Policy Statement (IPS)

This statement provides the general investment goals and objectives and describes the strategies to help you get there. It can help you hold yourself accountable, and ensures you are being thoughtful and deliberate with your investing decisions.

An investment policy question connects your goals to the actual investments. In addition to specifying your goals, priorities and investment preferences, a well-conceived IPS ensures that you have a set review process that enables you to stay focused on the long-term objectives. This way, you can ignore short-term noise and avoid irrational decisions.

We’ve created an investment policy statement template you can use to document your strategy. You can tailor it to your circumstances and preferences. If you’re investing for multiple goals—retirement as well as a home, for example—it will probably make sense to create a separate one for each goal.

This section explores how to create an Investment Policy Statement (IPS) for yourself - a tool used by professional investors and fund managers. 

Find the full guide on Morningstar Investor.

Types of Investments

Constructing your portfolio would have involved understanding your short-, medium- and long-term goals, and the asset allocation required for each. Short-term goals will require assets with liquidity and little to no volatility—most likely a cash product. Your medium- and long-term goals will require a mix of assets, with the ratios depending on how much risk you need to take to achieve your goals. The types of investments that you have in each bucket will vary, so this process of selecting investments must be repeated for each bucket.

If you have not gone through this process, visit our Guide to Portfolio Construction.

Now that you understand your objectives and what you need to achieve them, let’s look at the vehicles you can use to get to these goals.

There are a number of considerations to be made when deciding on the investments that make up your portfolio. The main questions to ask are:

1. Are you going to invest in individual securities or collective investment vehicles?
2. For collective investment vehicles are you going to employ an active or a passive strategy?
3. Are you going to focus on exchange-traded or non-exchange traded products?

1. Are you going to invest in individual securities or collective investment vehicles?

The first step to choosing an investment is understanding whether individual securities or collective investment vehicles suit your circumstances.

There are benefits to both and investing in one does not mean that you are barred from considering the other. In most instances, both individual securities and collective investment vehicles have a place in an individual’s portfolio.

For this section, we can go through the some of the circumstances that may suit both types of investments, and how they may help you reach your financial goals.

We go through these circumstances in detail in the full guide on Morningstar Investor.

2. Collective investment vehicles: an active or passive strategy?

If you are investing in a collective investment vehicle, you must decide if you are going to employ an active strategy, or a passive strategy. An active strategy is when you outsource your funds to a professional manager who will invest the funds based on a particular strategy and investment style, looking to beat a benchmark set for the fund. A passive strategy is when a fund (exchange-traded or unlisted) tracks an index or portfolio—in other words, no stock-picking is occurring. However, it is worth noting that you do not need to exclusively use one or the other. You can be a proponent of both active and employ passive when constructing your portfolio.

To understand where each strategy might fit in your portfolio, there are pertinent considerations. You can find the full guide, and these considerations in Morningstar Investor. 

3. Are you going to focus on exchange-traded or non-exchange traded products?

The table above shows a few key differences between the vehicles.

The complete Guide to Selecting Investments explores what type of investors may benefit from listed or unlisted products on Morningstar Investor. Find it on Morningstar Investor.

How Morningstar Investor can help you with Selecting Investments

Portfolio X-Ray

Morningstar Portfolio X-Ray™ helps you understand at-a-glance the basic characteristics of a portfolio including its asset allocation, exposure to different investment styles, geographic regions and sectors.

Morningstar calculates numerous measures, based on an analysis of the full holdings of each fund within the portfolio, that help illustrate risk at both an individual fund and portfolio level. You can use the Portfolio X-Ray to understand your current asset allocation and the changes needed to meet a new allocation.

1. Asset Allocation

Many believe that asset allocation is the single most important determinant to overall portfolio performance, even more so than the selection of specific investments. Providing a true representation of the portfolio’s overall asset breakdown is key to helping you understand whether the portfolio is structured to help you reach your goals.

2. Stock Regions

This is a great way to quickly see in which regions your portfolio (or a specific fund) is invested. This will help prevent home bias or concentration risk and help with selecting collective investment vehicles for a particular allocation.

3. Stock Sectors

The Morningstar Sector Breakdown highlights exposure to defensive stocks (industries that are relatively safe and are likely not to be greatly impacted by market volatility), cyclicals (industries that do well in good times but tend to suffer in downturns) and sensitive stocks (stocks that although not immune to a bad economy, are less likely to be impacted than cyclicals). This could help a more cautious investor to look to expand their portfolios’ defensive exposure over their cyclical exposure.

4. Performance

Illustration of the portfolio performance compared to a benchmark, if available.

5. Morningstar Style Box

The Morningstar Style Box evaluates the style of the portfolio, such as growth or value and small, medium or large cap which can increase your understanding of the risk held in your portfolio.

6. Analyse the Overall Sector Exposure of a Portfolio

The Morningstar Portfolio X-Ray™ report provides in-depth numerical analysis—as well as a visual representation—of the portfolio’s overall sector exposure.

Discover investments

Morningstar provides qualitative research coverage on over 2,000 equities, ETFs, Funds and Hybrids alongside data on over 50,000 global securities. Discover investments is designed to allow you to find the investment opportunities that fit your needs.

Stock filter

Morningstar Investor provides access to a vast array of stock data and research that allows subscribers to Discover investments. We provide data on over 43,000 global equities. As a Investor subscriber you can access qualitative research from our global team of over 100 equity analysts on more than 1600 companies. For the remainder of our coverage universe we provide our proprietary quantitative ratings which are designed to mimic our analyst-driven ratings.

Our stock filters can be used by Morningstar Investor subscribers to comb through our comprehensive set of data and research to discover new investment opportunities. We have two sets of stock filters available:

Pre-defined filters: Our pre-defined filters identify companies that we believe are trading at a significant discount to what they are worth, have a long-term competitive advantage or meet the criteria for a thematic such as inclusion on our Global Equity Best ideas list or securities that generate sustainable income.

User-defined filters: Select your own criteria to filter more than 43,000 global companies. You can select 15 filters across 5 categories including Morningstar analyst ratings, valuation and profitability measures, growth metrics and performance history. Filters can be saved to allow you to periodically check if additional companies meet your criteria. To set up and save a stock filter follow this link, select “Add filter”, select “Stocks”, select “Filters” and select your criteria. Selecting “Apply” will filter through our universe of equity data to identify the results. To save the filter simply select “Save” and add a name and description. Your filter will be available on the “Investment filters” tab

Fund filter

Morningstar Investor provides access to data and research on Australian domiciled funds. As an Investor subscriber you can access qualitative research from our team of Sydney-based manager research analysts on more than 350 managed funds.

Our Fund filters can be used by Morningstar Investor subscribers to comb through our comprehensive set of data and research to discover new investment opportunities. We have two sets of fund filters available:

Pre-defined filters: Our pre-defined filters identify funds that our analysts believe have the ability to outperform their peer group and/or relevant benchmark on a risk-adjusted basis over the long term. We have grouped the pre-defined filters by different asset classes.

User-defined filters: Select your own criteria to filter through our universe of funds. You can select 15 filters across 5 categories including Morningstar analyst ratings, yield and cost and performance. Filters can be saved to allow you to periodically check if additional funds meet your criteria. To set up and save a stock filter follow this link, select “Add filter”, select “Funds”, select “Filters” and select your criteria. Selecting “Apply” will filter through our universe of fund data to identify the results. To save the filter simply select “Save” and add a name and description. Your filter will be available on the “Investment filters” tab.

ETF filter

Morningstar Investor provides access to data and research on ETFs. As an Investor subscriber you can access qualitative research from our team of manager research analysts on more than 70 ETFs.

Our ETF filters can be used by Morningstar Investor subscribers to comb through our comprehensive set of data and research to discover new investment opportunities. We have two sets of ETF filters available:

Pre-defined filters: Our pre-defined filters identify ETFs that our analysts believe have the ability to outperform their peer group and/or relevant benchmark on a risk-adjusted basis over the long term. We have grouped the pre-defined filters by different asset classes.

User-defined filters: Select your own criteria to filter through our universe of ETFs. You can select 15 filters across 5 categories including Morningstar analyst ratings, yield and cost and performance. Filters can be saved to allow you to periodically check if additional funds meet your criteria. To set up and save a stock filter follow this link, select “Add filter”, select “ETFs”, select “Filters” and select your criteria. Selecting “Apply” will filter through our universe of ETF data to identify the results. To save the filter simply select “Save” and add a name and description. Your filter will be available on the “Investment filters” tab.

Watchlist

The watchlist is a tool that can be used to track stocks, ETFs and funds for further research. The watchlist can be used to observe price movements as you wait for a more compelling buying opportunity or to track Morningstar ratings, company profile information and performance. To add or remove a security from your watchlist, find the security in the discover investment tab or in the search box and click the heart icon.