Morningstar glitch prompts advisers to question data sources

A recent data glitch by Morningstar has raised questions among financial advisers on what data they should trust when assessing funds’ asset allocation.

Misleading data could become extremely costly to advisers who rely upon data from investment research firms, experts warn.

Wishart Wealth Management managing director Iain Wishart recently raised with 7IM a large misallocation to bonds, cash and money market instruments in the firm’s AAP Balanced fund when comparing Morningstar data against 7IM’s own fund sheet.

The asset allocation to bonds, cash and money market instruments indicated by Morningstar is “miles out” from the allocation stated by 7IM as at 31 August of 2015, says the adviser.  

The Morningstar fund X-ray shows the 7IM fund invests 72.26 per cent in bonds, cash and money market instruments, while in reality that figure is only 37.4 per cent.

However, 7IM fund manager Ben Kumar says Morningstar had a “a skewed asset allocation” because of the way they calculate the total exposure of the fund’s holdings in derivatives, in particular the equity futures held by the fund.

7IM is talking to Morningstar “quite actively” to solve the issue, Kumar says, adding: “it takes a long time to get the message through.”

In an online response to Wishart, 7IM says: “We are aware of this issue with Morningstar, which stems from our use of futures within our funds. As you can see on the snapshot of the 7IM AAP Balanced fund we use a number of futures across the various equity asset classes that we have in our asset allocations, and we use cash and short-term bonds as collateral to back these positions.”

According to 7IM, Morningstar is interpreting these assets as cash and bonds, rather than the equities to which the investment firm is exposed.

A Morningstar spokesperson says: “The differences highlighted [by Wishart], compared to the fund’s own fact sheet, relate to the fund’s holdings in derivatives and in particular the equity futures held by the fund which are impacting its actual economic exposure to equities.

“We are working with 7IM to review the data we receive so that the X-Ray analysis better reflects the derivatives exposure.   

“We are leading an industry project here, employing a more detailed ‘advanced portfolio template’ to support asset managers in sharing their derivatives holdings information with us and other industry stakeholders in a standardised format.”

Equilibrium Asset Management partner and investment manager Mike Deverell says he sees asset allocation discrepancies “all the time”, partly because different fund managers and different research tools classify things in different ways.

He says: “For example, one of the platforms we use provides asset breakdowns from Morningstar and they split out our property funds into one of two categories: “property” and “real estate”. To our mind they are all just property funds – there’s no real difference between them.”

Thameside Financial Planning director Tom Kean says he always marvels at the asset allocation models discrepancies and that “someone has to have a closer look” at these issues when they happen.

He says: “We as advisers have to rely on the data we get. We are very reliant on organisations such as Morningstar.

“A lot of what we do is asset allocation-based so if data is wrong there could be massive implications.” 

Deverell adds: “Derivatives are notoriously difficult to classify, as are structured products, which may be linked to equity but might be legally structured as a bond.

“Often, using off the shelf asset allocation tools we end up with a large chunk in ‘other’, ’unclassified’ or ’not disclosed’. For that reason, we create our own asset allocation charts rather than relying on a third party system.”