3 themes Morningstar's Aman Ramrakha is watching

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Aman Ramrakha holds a powerful place in the world of finance. As Director of Manager Selection Services for Morningstar Australasia, he has the ability to make or break funds management businesses eager to receive mandates from super funds and make it into the approved lists of dealer groups and private banks.

A good score is hard to earn – only 10% of funds have a five-star rating from Morningstar, so a poor rating or downgrade could mean a fund is shunned in the eyes of professional allocators responsible for investing large sums of money.

In the process of dealing with fund managers and adviser groups, Ramrakha also has the privilege of seeing investment trends chop and change before him, and in this regard, he believes there are three to watch: value, ESG, and infrastructure.

As part of Livewire’s Top-Rated Funds Series, he expands on those themes, nominates some funds to play them, and shares his views on some of the biggest topics in the market.

Edited transcript

James Marlay: What’s the topic that you and your team are spending the most time debating right now?

Aman Ramrakha: Anything to do with interest rates, inflation, income, I think are very much topical right now. It's an area where, given where interest rates are, a lot of people, particularly on the defensive side of their portfolio, are struggling to generate the income that they had previously. And I dare say that the fund managers are experiencing some very similar questions, particularly those who are in the fixed income space.

James Marlay: How do you generate income when those traditional yielding assets are no longer doing that same job?

Aman Ramrakha: You almost have to have a think about what it is you want particularly about the defensive part of your assets. So, people think about portfolio construction. They think about why I hold bonds, particularly government bonds or investment-grade bonds. If you're holding that, there is a general expectation that that is a defence against the remainder of your portfolio. So, if that's your primary reason for constructing a portfolio using traditional bond design, that’s one way of thinking of them. You have to almost accept what's coming down the pipe in terms of where rates are and what kind of returns. If you're thinking that that part is an income generator, then that begs a slightly different question and has a slightly different answer attached to it. And invariably, it'll take you down credit or high yield or in a, perhaps more sort of unconstrained part of the fixed income spectrum but that also comes with some additional risk.

There was a time where your traditional bonds gave you a decent return. Not being able to generate those types of returns is something that is now challenging.

James Marlay: Could you give me some examples of how that's impacting the way you're thinking about putting portfolios together?

Aman Ramrakha: If you look at it from an asset allocation point of view, over the last little while holding cash was a good defence given where cash rates are now. 

Some of our thinking around portfolio construction is to try and hold less cash and deploy more of that into the fixed income spectrum. 

So, we're seeing that and then within the fixed income spectrum also, really thinking about what kind of managers you want. Perhaps if you were looking for managers where generating income is a greater part of their process, that's one of the things that we're doing from a portfolio construction point of view.

James Marlay: If you think about people moving through a cycle from the depths of despair, through to scepticism, into optimism and then those euphoric peaks, using that as a simple framework, where would you say we are?

Aman Ramrakha: I think there's probably still a reasonable amount of optimism in the market today. One way of looking at it is just growth. 

If you look at all the forecasts for GDP growth, they all look rosy and paint a fantastic picture. Not just this year but beyond, there are some reasonably strong growth numbers coming down.

Some of that is a bit of a bounce off the depths of the pandemic and what happened to economies but I think that as a forward-looking indicator is certainly a positive. Now, that doesn't always correlate to returns in the market but the medium-term outlook for growth seems to be strong and that would suggest that people are somewhat optimistic over at least the next couple of years.

James Marlay: Over a five-year timeframe, can you share one or two themes that you think will be really important for driving returns for portfolios?

Aman Ramrakha: 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 product sets that they have out in the marketplace.

The other piece of the puzzle is very much on this value versus growth piece. We're seeing value come back hard and I think that's an area we’re starting to watch in terms of thinking about what that means for portfolio construction.

James Marlay: Can you share a few of the funds that Morningstar has reviewed or have passed your filters, particularly for those ESG and value versus growth dynamics?

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 meeting bottom-up demand.

James Marlay: Is that a very generous way of saying we're behind?

Aman Ramrakha: Yes. And certainly, managers that we've rated so far, which is only a very small cohort of our overall coverage, some of the intentional strategies like Australian Ethical, we recently gave the highest ranking. And AIM, which is a fixed income manager in the green bond space. There're two managers that have taken out our highest commitment level. What it demonstrates is that they have a very established process, they have a higher chance of getting better rankings 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. So, we anticipate that they'll catch up.

James Marlay: What asset class do you think is underappreciated by investors and has an important role to play in portfolios?

Aman Ramrakha: I think something like infrastructure has certainly, institutionally and on the unlisted side, been in play for a long time. All the major super funds have been doing it. 

I think for retail investors, areas like property and infrastructure have suffered quite significantly. Think of airports and the like. But I do think that it's got some good long-term legs to it beyond some of the dislocation caused by the pandemic. 

That's an area that we're watching very closely. There are some very good global infrastructure managers that we rate who play in that space and we think that's an area that should continue to have an allocation in portfolios.

James Marlay: If you were to go back to the start of your career and give yourself a piece of advice that would help improve your success rate when it comes to picking good fund managers, what would that be?

Aman Ramrakha: Having a reasonably healthy dose of scepticism is always a good starting point for a researcher. 

No fund manager is going to tell you that they’re moderate or mediocre at what they do, they'll all tell you that they're good. 

So, I always think that if you start as a researcher along those lines, certainly that's a good starting point.


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