Mind the Gap - Asia 2017

Mind the Gap - Asia 2017

Executive Summary

Since 2005, Morningstar has published annual “Mind the Gap” studies that aim to shed light on

whether U.S. mutual fund investors have benefited from their market timing decisions. This year, we

“globalised” the study to find out if mutual fund investors in other markets have also suffered from

returns gaps—that is, the difference between a fund’s time-weighted return, and the “actual” return

that investors achieved when timing decisions are taken into consideration.

This paper seeks to explore whether investors within the open fund markets in Asia, namely Hong Kong,

Singapore, and Taiwan, suffer from similar returns gaps. We decided to focus on these markets not only

because of their representations within the region, but because of the way mutual funds are often sold

by commission-based distributors, which at times encourages frequent switching. Moreover, investors

pay no capital gains tax. The end result is that mutual fund investors in Hong Kong, Singapore and

Taiwan tend to have shorter investment horizons. However, practice doesn’t make perfect with our

study confirming that Asian investors face similar challenges in timing their investments, and that the

gaps in returns were largest in more volatile, concentrated equity strategies.

There are, however, some positives we can take from this study. Based on Morningstar’s experience

from conducting the analysis in the U.S., Korea, and Australia, we learnt that investment vehicles

requiring regular investments tend to produce better investor returns. As retirement markets around the

globe have moved from defined benefit to defined contribution schemes, investors are often required to

make investment decisions they may not be equipped to do. This has led to regulatory interventions in

markets such as Hong Kong, where the Default Investment Scheme, or DIS, was launched on 1 April

2017 to allow investors to make periodic investments into a highly diversified, low-cost, multi-asset

strategy that automatically reduces its exposure to riskier assets as an individual approaches retirement.

Similarly, in Singapore, the Central Provident Fund, or CPF, explored the introduction of a Lifetime

Retirement Investment Scheme, or LRIS, which consists of a few well-diversified, passively managed

products. We believe these are welcome developments that should help reduce the returns gap

experienced by investors, and provide them a simpler and more effective path towards achieving their

financial goals. K

Morningstar Manager Research, Asia May 2017 Contents 1 Executive Summary 2 Introduction 3 What are "Gaps" and how do we calculate them? 4 Unique challenges in the Asia study 5 What are the return gaps 8 Factors behind the gaps 11 The secret to narrowing return gaps - Automatic Investment Plans? 12 Conclusion 13 Appendix 32 Disclosures Arthur Wu, CFA, CAIA, FRM Senior Analyst, Manager Research Wing Chan Director of Manager Research, Asia

Important Disclosure The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of Conduct Policy, Personal Security Trading Policy (or an equivalent of), and Investment Research Policy. For information regarding conflicts of interest, please visit: http://global.morningstar.com/equitydisclosures

©2017 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints or to license the research, contact your Morningstar Representative. See last page for important disclosures.

Mind the Gap - Asia 2017 | 2 June 2017 | See Important Disclosures at the end of this report. of 36

Introduction

“Mind the Gap” is a study that aims to quantify the impact of market timing decisions made by mutual

fund investors. The study sheds light on whether investors benefit from their market timing decisions,

the magnitude of the benefit/detriment of these decisions, plus it aims to identify certain mutual fund

characteristics which could possibly enhance/diminish that magnitude.

The first “Mind the Gap” study was published in the U.S in 2005. By comparing a fund’s investor returns

(money-weighted returns) and total returns (time-weighted returns), we found that investors are NOT

proficient in timing the markets, and, on aggregate, investors suffered from their market timing decisions.

The U.S. study was updated on an annual basis and the results have remained largely consistent over

the years. In 2016, we extended the study to include European investors, and the results told a similar

message: fund investors generally make subpar market timing decisions.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” Warren Buffett

Investing is a beautiful game but when fear and greed take over, investors make mistakes. They

sometimes buy into an investment after it has run up on price, but panic during market turmoil and sell

out at a loss. This contradicts the notion of buying low and selling high, and Exhibit 1 shows an example

of this phenomenon. The blue line shows the performance of a popular Asian ex-Japan equity fund

between 2007 and 2009, while the bars depict the monthly net flows of the fund. It quickly becomes

evident that investors are poor market timers; there were massive inflows in September/October 2007

when the fund performed strongly at the peak of the bull market, and investors did not re-enter the fund

until fund performance rebounded on the back of the market run-up in 2009.

Exhibit 1 Contrary to the notion of buying low and selling high…

Source: Morningstar Direct as of 31/12/2016. Note: Fidelity Asia Focus (old Name: Fidelity South East Asia) in USD terms for period 2007 to 2009.



It is particularly interesting to extend the study to Asia because anecdotally, Asian investors tend to be

more active in market timing and have shorter investment horizons than their peers in the U.S. and

Europe. One possible reason for this might be the lack of capital gains taxes in markets such as Hong

Kong, Singapore and Taiwan, which means investors do not incur any taxes when they switch in and out

of funds. In addition, mutual funds in these markets are often sold by commission-based distributors,

who may encourage investors to frequently change their fund investments so the distributors earn more

in fees.

What Are “Gaps” and How Do We Calculate Them?

To measure how much investors benefit or suffer from market timing, we need to calculate the return

“gaps,” which essentially refers to the difference between total return and investor return. Total return,

which is also known as time-weighted rate of return, or TWRR, captures the total, geometric returns

that an investment generates over time. Investor return, on the other hand, refers to the actual return

investors experience taking into consideration the impact of cash flows. Thus, investor returns are also

known as money-weighted rate of return, or MWRR. To aggregate a fund’s investor return data, it is

asset-weighted using the average of assets under management over the period being measured. Such

data is then aggregated at the asset class level.

We then compare the asset-weighted return to total return within each asset class grouping to

determine the average investor experience. The gap between the two figures tells us how well investors

have timed their investments in aggregate. For the purpose of this study, exchange-traded funds are

excluded because it is difficult to estimate investor intent.

As an example, consider a mutual fund that generated a return of 5% in 2016—this is the total return.

But from an investor’s perspective, investor returns can differ when their market timing decisions are

taken into consideration.

Scenario 1: Alex invests $100 on 1 January 2016 and stays invested over the course of 2016. The total

return was the same as the investor return, that is, 5%, and there was no returns gap.

Scenario 2: Barry invested $50 on 1 January 2016. After seeing his investment grow by 50% in the first

six months, he decided to invest another $50 on 1 July 2016. Unfortunately, the market fell by 30% in

the second half of 2016, leaving Barry with an investor return of negative 16.4% for the year. This

resulted in a negative returns gap of negative 21.4%.

Scenario 3: Chris invested $50 on 1 January 2016. Although his investment fell by 30% in the first six

months, he decided to invest another $50 on 1 July 2016. Luckily for Chris, the market rebounded by

50% in the second half of 2016, leaving Chris with an investor return of 37.6% for the year. This resulted

in a positive returns gap of 32.6%.



These are simplified examples of the calculations. In practice, we also consider other factors such as

dividends and fund mergers. For quant enthusiasts who are interested in the specifics, we have a white

paper which depicts the calculations1 in greater details.

Echoing the “Mind the Gap” studies in other regions, we also broke down the data into several factors

such as risk, fund expenses, and manager tenure, with the aim to explore whether such factors can

affect the magnitude of the investor gap.

Unique Challenges in the Asia Study

Unlike the U.S. and Europe studies, the Asia study posed several unique challenges. One of the biggest

challenges was that a large preponderance of funds available for sale in the Asian open markets of Hong

Kong, Singapore, and Taiwan are funds also available for sale in other markets. Although we could

calculate the returns gaps on these offshore funds, it was difficult to fully differentiate the Asia-based

investors from those investors not based in Asia. Therefore, we adopted the following approach:

1. Compare the returns gap between Luxembourg-domiciled offshore funds; and all offshore

(which includes Luxembourg, Ireland and Cayman Island domiciles) and locally-domiciled funds

that are available for sale in Asia.

2. Compare the returns gap between all offshore and locally-domiciled funds available for sale in

Asia; as well as locally-domiciled funds in Hong Kong, Singapore, and Taiwan.

In calculating investor returns, the availability of monthly share class level assets for each fund is crucial.

However, we are yet to have full data coverage for funds available for sale in Asia. Therefore, we

consider the data preliminary and the results intriguing rather than conclusive.

In addition, we left out convertible, alternative, and money market funds as standalone groupings, as

well as funds that have a currency bias/hedge of any currency outside of Hong Kong, Singapore and

Taiwan, or G3, such as U.S. dollars, Euros, and Japanese yen.

The original “Mind the Gap” study in the U.S. focuses on the 10-year gap but when the study expanded

to include European markets in 2016, it focused on a five-year gap because of the availability of data in

European markets. While the use of shorter-term data comes with the obvious advantage of an

expanded data universe, it failed to capture the full investment cycle which included events such as the

global financial crisis in 2008. Given that the investment universe within the open markets in Asia is not

dissimilar to Europe, this paper also focuses on five-year data but we will look to extend the time horizon

in the future when sufficient data is available.

We broke down our study universe into four categories: (i) concentrated equities; (ii) diversified equities;

(iii) fixed income; and (iv) allocation. Concentrated equities refer to equity funds that invest in a single

1 Investor Return white paper:

https://corporate.morningstar.com/us/documents/MethodologyDocuments/MethodologyPapers/InvestorReturnMethodology.pdf

https://corporate.morningstar.com/us/documents/MethodologyDocuments/MethodologyPapers/InvestorReturnMethodology.pdf



country (apart from those that invest in the U.S, as they are generally considered as a key part of

strategic asset allocation) or a single sector, while diversified equities refer to funds that invest in more

than one equity market.

We elected to split the equity universe into two because we understand that investor behavior often

differs between diversified and concentrated equity funds—a more diversified, regional equity fund is

often considered as part of strategic asset allocation, but investors often consider a niche, single

country/sector fund as more of a tactical play. Anecdotally, we also learnt that investors in Asia tend to

show greater interests in niche, thematic funds that may only invest in a small subset of the broader

equity market. As well, they are often launched at times when such themes are popular, so it is worth

exploring whether investors have been successful in timing their entry and exits into these types of

strategies.

Finally, considering the lack of fund options within the alternatives space, we only included the returns

gap for these funds as part of the calculation of the returns gap for all funds.

What Are the Returns Gaps?

Exhibit 2 depicts the returns gap between Luxembourg-domiciled funds and the offshore and locally-

domiciled funds available for sale in Hong Kong, Singapore, or Taiwan. Generally, funds available for sale

in Asia had larger gaps than Luxembourg-domiciled funds, implying that investors in Asia tend to suffer

more from timing decisions. The largest gaps were observed in allocation funds, but this was largely

driven by compositional differences between the two markets. More specifically, unlike the Luxembourg-

domiciled universe, the allocation funds available for sale in Hong Kong, Singapore, and Taiwan are

dominated by five products, meaning that the number should be taken with a pinch of salt. On the other

hand, diversified equity was the only group where funds available for sale in Asia did better.



Exhibit 2 Five-year Returns Gap

Source: Morningstar Direct as of 31/12/2016. Note: Data five years through end 2016. Gaps are asset-weighted investor returns minus average total returns. Data is displayed in USD terms.

Exhibit 3 shows the returns gap between Luxembourg-domiciled and locally-domiciled funds in Hong

Kong, Singapore, or Taiwan.

Exhibit 3 Five-year Returns Gap

Source: Morningstar Direct as of 31/12/2016. Note: Data five years through end 2016. Gaps are asset-weighted investor returns minus average total returns. Data is displayed in USD terms.



Asian Investors Suffered the Largest Gaps in Concentrated Equity Funds

The returns gaps in concentrated equity funds were particularly interesting. Looking at Exhibit 2, while

the returns gaps between concentrated (negative 0.52%) and diversified equity groups (negative 0.50%)

were almost identical within the Luxembourg-domiciled universe, the returns gap was noticeably larger

for Luxembourg- and locally-domiciled funds available for sale in Hong Kong, Singapore or Taiwan

(negative 0.87%). And if we focus only on locally-domiciled funds shown in Exhibit 3, we see

significantly larger gaps for Taiwan (negative 2.37%), Hong Kong (negative 2.96%), and a whopping

negative 4.32% for Singapore-domiciled funds. Here, we examine the data and try to understand the

underlying reasons behind the large returns gaps experienced by investors.

Asian Investors Timed the Commodity Complex Badly via Commodity-Related Equities

The commodity super-cycle of the 2000s resulted in a period of exceptionally strong performance for

commodity-related equity funds, and this may have left a lasting impression for many investors. Over the

past five years, other than 2016, commodity prices were among the worst-performing assets and

investors have been rather unsuccessful in calling the bottom of commodity-related equity funds,

resulting in large returns gaps in this category (see Exhibit 4).

Exhibit 4 Asian investors timed the commodity complex badly

Source: Morningstar Direct as of 31/12/2016. Note: Estimated monthly flows. In USD terms. Performance and Total flows are the average of Sector Equity – Energy and Sector Equity – Industrial Metals that is available for sale in either Hong Kong, Singapore or Taiwan.

Asian Investors Generally Did Not Make the Right Single Country and Single Sector Equity Calls

Outside of commodity-related equity funds, we also observed large returns gap in Japanese equities

(especially in 2012 and 2013 when Abenomics were first introduced), and in Chinese equity and Indian

equity funds. In the latter cases, the returns gaps were not concentrated in certain years, but rather,



spread out over the five-year period. From an individual market perspective, Singapore-domiciled funds

saw larger returns gaps in Healthcare and Indian equities, Hong Kong-domiciled funds saw larger returns

gaps in Japanese equities, while the largest returns gaps in Taiwan-domiciled funds were attributed to

REIT funds.

All these allude to investors’ dismal track record in trying to time markets, especially in single

country/sector funds which are often more volatile. This suggests that investors might be better served

by taking a longer-term, diversified approach towards their investments.

Factors Behind the Gaps

We have discussed the gaps and attempted to uncover reasons to explain them. We will now look at

various fund factors which might impact the magnitude of the gap.

We look at three factors in this study: a fund’s risk metric (standard deviation and our proprietary

Morningstar Risk measure); a fund’s expense ratio; and the portfolio manager’s tenure on the fund. We

will attempt to answer the question, “What sort of funds exhibits larger or smaller returns gaps?”

Risk (Standard Deviation and Morningstar Risk)

Since fear and greed are among basic emotions that investors possess, it is not surprising to see that

the riskier the fund, the more tempted investors are to make buy and sell decisions, which can in turn

magnify their returns gap. Previous “Mind the Gap” studies suggested that funds with higher volatility

often led to worse returns gaps.

Here we sort a fund’s risk in two ways: relative to the fund’s category, and relative to the broad mapping

group. For example, we sorted the volatility of a fictitious ABC Singapore equity fund against both the

Singapore equity Morningstar Category, as well as the Concentrated Equity group which contains all

single country/sector equity categories. This is useful in categories where limited data is an issue.

We also used two measures of volatility, namely standard deviation and Morningstar Risk, our

proprietary risk measure. For brevity’s sake, standard deviation measures total risk (upside and downside

volatility), while Morningstar Risk penalises downside volatility.

According to the data set, we see a clear pattern within concentrated equity funds (Exhibit 6 and 7).

Interestingly, the riskiest quintile stood out with the largest returns gaps, and it is perhaps not difficult to

understand why. Over the years, we have seen numerous examples of investors getting attracted into

highly concentrated equity strategies on the back of seemingly attractive thematic or stories, only to see

markets reverse, resulting in significant losses. In addition to the example around commodity funds,

notable returns gaps were observed in concentrated equity strategies such as Japanese equities in

2013, Biotechnology equities in 2014 and 2015, and Russian equities in 2015.



Exhibit 5 Other examples within concentrated equity

Category Group Large negative Gap (year) Possible reasons

Japan Equities Concentrated Equities 2013 Abenomics Biotechnology Equities Concentrated Equities 2014, 2015

Yellen’s speech on Biotechnology in 2014, before the market peaking in 2015

Russia Equities Concentrated Equities 2015 News on the Annexation of Crimea

Source: Morningstar Direct as of 31/12/2016.

For the other asset class groupings, we saw no notable correlations between risk measures and returns

gaps. This may be explained by the time period we used for this study. For the past five years, it has

been a benign, up-trending market for equities and fixed income securities. With the exception of niche

equity strategies, diversified equity funds have generally performed well. Within fixed income, most

sectors have delivered steady, positive performance irrespective of the level of risk taken.

Exhibit 6 Concentrated Equity - Five-year Returns Gap - split by standard deviation

Source: Morningstar Direct as of 31/12/2016. Note: Split by standard deviation quintiles - against grouping



Exhibit 7 Concentrated Equity - Five-year Returns Gap - split by Morningstar Risk

Source: Morningstar Direct as of 31/12/2016. Note: Split by Morningstar Risk quintiles - against grouping

Expense Ratio

The expense ratio measures the cost borne by investors when they invest in mutual funds. Results of

previous “Mind the Gap” studies in the U.S. and Europe showed a clear trend that the more expensive

the fund, the larger the returns gap tends to be. For investors in Asia, the fee impact on investor returns

was the strongest within fixed income funds.

Some explanations on why fees correlate with better investor returns were documented in the previous

U.S. studies. For one, investors in cheaper funds may represent a cohort of savvier investors who prefer

low-cost funds, and they might be better at market timing. The active-passive debate might offer some

explanation. Index funds, for instance, tend to be low cost. The 2016 Europe study found that returns

gaps were positive for index funds, while the 2016 U.S. study found a negative correlation between a

fund’s tracking error and returns gaps. However, this is not a plausible explanation for Asia as it does not

explain why the fee effect is not present in other groupings other than fixed income (Exhibit 8).

A possible reason quoted in earlier studies was that low-cost funds are more eminent among retirement

schemes. Since investors are mandated to make periodic contributions to their own retirement accounts,

it has the effect of a dollar-cost averaging strategy—by making a fixed investment towards a fund,

investors benefit from buying more units when prices are low, and less units when prices are high. In

other words, investors in these funds have a far greater chance of narrowing their returns gap, or even

achieving a positive returns gap, by adopting such a strategy.

The defined contribution scheme in Singapore (Central Provident Fund, or CPF) echoes some of these

characteristics. In September 2014, the CPF Board placed a lower cap on the total expense ratio for



funds on its platform, and new managers who wanted to onboard their products on CPF’s platform must

adhere to the lower fee caps.

Exhibit 8 Concentrated Equity - Five-year Returns Gap - split by expense ratio

Source: Morningstar Direct as of 31/12/2016. Note: Split by expense ratio quintiles - against grouping

Manager Tenure

Manager tenure refers to the time portfolio managers spent managing the fund. We did not find any

relationship between this factor and the returns gaps. This result is consistent with our studies in other

regions.

The Secret to Narrowing Returns Gaps - Automatic Investment Plans?

As part of our global “Mind the Gap” study, we observed positive returns gaps in South Korea among

fixed income funds, in Australia among superannuation funds, and in the U.S. among target date funds.

The link across these markets are automatic investment plans, or AIPs. AIPs refer to investment

programs that allow investors to contribute small amounts of money at regular intervals. Funds are

automatically deducted from the investor’s checking/savings account or paycheck and invested into the

plan. Judging by the positive gaps for funds under AIPs in these regions, it appears that these plans kept

investors disciplined and prevented them from making unwise market timing decisions. Seeing this work

in three different investment cultures is a strong endorsement for the practice worldwide.

AIPs already exist in Asia, and they are likely to become more prominent as governments start to

intervene. In defined contribution retirement schemes, regulators setting frameworks where low-cost

diversified offerings with regular contributions (AIPs) are either the default or part of the default options.



For example, in Hong Kong, starting from 1 April 2017, each Mandatory Provident Fund2 scheme will

offer a Default Investment Strategy3 which puts investors’ money in lower-cost balanced strategies if

they do not make an investment choice. In Singapore, the Central Provident Fund4 is currently in talks of

introducing a Lifetime Retirement Investment Scheme (LRIS), which is similar-in-nature to the DIS in that

they are both low-cost passively managed investments which require regular investments. Given the

positive returns gaps we have witnessed and the increasing importance of lower-cost investments,

these developments in Asia are laudable and we hope that they will help provide better outcomes to

investors.

Conclusion

Overconfidence is a common behavioral bias, and this study confirms that investors in Asia are no

different when it comes to their ability to effectively time market entries and exits. We learnt that

returns gaps are often larger in more volatile, concentrated equity strategies, while smaller gaps can be

observed in the more diversified, lower cost options that are often associated with retirement schemes.

All these suggest that investors are perhaps best placed to adopt a long-term mindset, focus on broad-

market strategies, and seek to invest through dollar-cost averaging or automatic investment plans.

Thankfully, we are encouraged to see that a number of pension fund regulators in Asia are promoting

this approach, and we believe this is a welcoming development that should help investors better achieve

their financial goals. K

2 Details on the Mandatory Provident Fund: http://www.mpfa.org.hk/eng/mpf_system/background/index.jsp

3 Default Investment Scheme: http://www.mpfa.org.hk/engm/main/DIS/index.jsp

4 Details on the Central Provident Fund: https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-overview

http://www.mpfa.org.hk/eng/mpf_system/background/index.jsp

http://www.mpfa.org.hk/engm/main/DIS/index.jsp

https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-overview



Appendix 1

Five-year Returns Gap

Returns Gap - Asset-Weighted and average total and investor returns - data in USD terms



Appendix 2

Category Mapping Allocation - Category Mapping EAA Fund Asia Allocation EAA Fund EUR Aggressive Allocation - Global EAA Fund EUR Cautious Allocation EAA Fund EUR Cautious Allocation - Global EAA Fund EUR Flexible Allocation EAA Fund EUR Flexible Allocation - Global EAA Fund EUR Moderate Allocation EAA Fund EUR Moderate Allocation - Global EAA Fund Global Emerging Markets Allocation EAA Fund Other Allocation EAA Fund Target Date 2016 - 2020 EAA Fund Target Date 2021 - 2025 EAA Fund Target Date 2026 - 2030 EAA Fund Target Date 2036 - 2040 EAA Fund Target Date 2041 - 2045 EAA Fund Target Date 2046+ EAA Fund TWD Aggressive Allocation EAA Fund TWD Cautious Allocation EAA Fund TWD Moderate Allocation EAA Fund USD Aggressive Allocation EAA Fund USD Cautious Allocation EAA Fund USD Flexible Allocation EAA Fund USD Moderate Allocation Concentrated Equities - Category Mapping EAA Fund Canada Equity EAA Fund China Equity EAA Fund France Large-Cap Equity EAA Fund Hong Kong Equity EAA Fund India Equity EAA Fund Indonesia Equity EAA Fund Islamic Equity - Other EAA Fund Italy Equity EAA Fund Japan Equity - Currency Hedged EAA Fund Japan Flex-Cap Equity EAA Fund Japan Large-Cap Equity EAA Fund Japan Small/Mid-Cap Equity EAA Fund Property - Indirect Asia EAA Fund Property - Indirect Europe EAA Fund Property - Indirect Global EAA Fund Property - Indirect North America EAA Fund Property - Indirect Other EAA Fund Russia Equity EAA Fund Sector Equity Agriculture EAA Fund Sector Equity Alternative Energy EAA Fund Sector Equity Biotechnology EAA Fund Sector Equity Communications EAA Fund Sector Equity Consumer Goods & Services EAA Fund Sector Equity Ecology EAA Fund Sector Equity Energy EAA Fund Sector Equity Financial Services EAA Fund Sector Equity Healthcare EAA Fund Sector Equity Industrial Materials EAA Fund Sector Equity Infrastructure EAA Fund Sector Equity Natural Resources EAA Fund Sector Equity Other EAA Fund Sector Equity Precious Metals EAA Fund Sector Equity Technology EAA Fund Sector Equity Utilities EAA Fund Sector Equity Water EAA Fund Singapore Equity EAA Fund Spain Equity EAA Fund Switzerland Large-Cap Equity EAA Fund Switzerland Small/Mid-Cap Equity EAA Fund Taiwan Large-Cap Equity EAA Fund Taiwan Small/Mid-Cap Equity EAA Fund Thailand Equity EAA Fund Turkey Equity

EAA Fund UK Equity Income Concentrated Equities - Category Mapping (cont'd) EAA Fund UK Flex-Cap Equity EAA Fund UK Large-Cap Blend Equity EAA Fund UK Large-Cap Growth Equity EAA Fund Germany Large-Cap Equity EAA Fund Korea Equity EAA Fund Other Asia-Pacific Equity EAA Fund UK Small-Cap Equity EAA Fund Vietnam Equity Diversified Equities - Category Mapping EAA Fund Africa & Middle East Equity EAA Fund Asia-Pacific incl Japan Equity EAA Fund Australia & New Zealand Equity EAA Fund BRIC Equity EAA Fund Eurozone Mid-Cap Equity EAA Fund Global Small-Cap Equity EAA Fund Greater China Equity EAA Fund Islamic Global Equity EAA Fund Latin America Equity EAA Fund Nordic Equity EAA Fund Africa Equity EAA Fund ASEAN Equity EAA Fund Asia ex Japan Equity EAA Fund Asia ex Japan Equity - Currency Hedged EAA Fund Asia ex-Japan Small/Mid-Cap Equity EAA Fund Asia-Pacific Equity - Currency Hedged EAA Fund Asia-Pacific ex-Japan Equity EAA Fund Asia-Pacific ex-Japan Equity Income EAA Fund Brazil Equity EAA Fund China Equity - A Shares EAA Fund EMEA Equity EAA Fund Emerging Europe Equity EAA Fund Emerging Europe ex-Russia Equity EAA Fund Europe Equity - Currency Hedged EAA Fund Europe Equity Income EAA Fund Europe ex-UK Large-Cap Equity EAA Fund Europe ex-UK Small/Mid-Cap Equity EAA Fund Europe Flex-Cap Equity EAA Fund Europe Large-Cap Blend Equity EAA Fund Europe Large-Cap Growth Equity EAA Fund Europe Large-Cap Value Equity EAA Fund Europe Mid-Cap Equity EAA Fund Europe Small-Cap Equity EAA Fund Eurozone Large-Cap Equity EAA Fund Global Emerging Markets Equity EAA Fund Global Emerging Markets Equity - Currency Hedged EAA Fund Global Emerging Markets Small/Mid-Cap Equity EAA Fund Global Equity - Currency Hedged EAA Fund Global Equity Income EAA Fund Global Flex-Cap Equity EAA Fund Global Frontier Markets Equity EAA Fund Global Large-Cap Blend Equity EAA Fund Global Large-Cap Growth Equity EAA Fund Global Large-Cap Value Equity EAA Fund US Equity - Currency Hedged EAA Fund US Flex-Cap Equity EAA Fund US Large-Cap Blend Equity EAA Fund US Large-Cap Growth Equity EAA Fund US Large-Cap Value Equity EAA Fund US Mid-Cap Equity EAA Fund US Small-Cap Equity Fixed Income - Category Mapping EAA Fund Asia Bond EAA Fund Asia Bond - Local Currency EAA Fund Asia High Yield Bond EAA Fund Emerging Europe Bond EAA Fund EUR Corporate Bond



EAA Fund EUR Diversified Bond EAA Fund EUR Diversified Bond - Short Term Fixed Income - Category Mapping (cont'd) EAA Fund EUR Flexible Bond EAA Fund EUR Government Bond EAA Fund EUR High Yield Bond EAA Fund EUR Ultra Short-Term Bond EAA Fund Europe Bond EAA Fund Europe High Yield Bond EAA Fund Fixed Term Bond EAA Fund Global Bond EAA Fund Global Bond - EUR Hedged EAA Fund Global Bond - ILS EAA Fund Global Bond - USD Biased EAA Fund Global Bond - USD Hedged EAA Fund Global Corporate Bond EAA Fund Global Corporate Bond - EUR Hedged EAA Fund Global Corporate Bond - USD Hedged EAA Fund Global Emerging Markets Bond EAA Fund Global Emerging Markets Bond - EUR Biased EAA Fund Global Emerging Markets Bond - Local Currency EAA Fund Global Emerging Markets Corporate Bond EAA Fund Global Emerging Markets Corporate Bond - EUR Biased EAA Fund Global Flexible Bond EAA Fund Global Flexible Bond - EUR Hedged

EAA Fund Global Flexible Bond - USD Hedged EAA Fund Global High Yield Bond EAA Fund Global High Yield Bond - EUR Hedged EAA Fund Global Inflation-Linked Bond EAA Fund Global Inflation-Linked Bond - EUR Hedged EAA Fund Global Inflation-Linked Bond - USD Hedged EAA Fund High Yield Bond - Other Hedged EAA Fund HKD Bond EAA Fund Islamic Global Bond EAA Fund JPY Bond EAA Fund Other Bond EAA Fund Other Inflation-Linked Bond EAA Fund RMB Bond EAA Fund RMB Bond - Onshore EAA Fund RMB High Yield Bond EAA Fund SGD Bond EAA Fund TWD Bond EAA Fund USD Corporate Bond EAA Fund USD Diversified Bond EAA Fund USD Diversified Bond - Short Term EAA Fund USD Flexible Bond EAA Fund USD Government Bond EAA Fund USD High Yield Bond EAA Fund USD Inflation-Linked Bond



Appendix 3

Five-Year Offshore and locally domiciled funds available for sale in Asia factor – by Morningstar Category




Five-Year Hong Kong Factor by Morningstar category




Five-Year Singapore Factor by Morningstar category




Five-Year Taiwan Factor by Morningstar category




Appendix 4

Five-Year Offshore and locally domiciled funds available for sale in Asia factor – by Broad Group




Five-Year Hong Kong Factor by Broad Group




Five-Year Singapore Factor by Broad Group




Five-Year Taiwan Factor by Broad Group




General Disclosure

Unless otherwise provided in a separate agreement, recipients accessing this report may only use it in

the country in which the Morningstar distributor is based. Unless stated otherwise, the original

distributor of the report is Morningstar Research Services LLC, a U.S.A. domiciled financial institution.

This report is for informational purposes only and has no regard to the specific investment objectives,

financial situation or particular needs of any specific recipient. This publication is intended to provide

information to assist institutional investors in making their own investment decisions, not to provide

investment advice to any specific investor. Therefore, investments discussed and recommendations

made herein may not be suitable for all investors: recipients must exercise their own independent

judgment as to the suitability of such investments and recommendations in the light of their own

investment objectives, experience, taxation status and financial position.

The information, data, analyses and opinions presented herein are not warranted to be accurate, correct,

complete or timely. Unless otherwise provided in a separate agreement, neither Morningstar, Inc. or the

Equity Research Group represents that the report contents meet all of the presentation and/or disclosure

standards applicable in the jurisdiction the recipient is located.

Except as otherwise required by law or provided for in a separate agreement, the analyst, Morningstar,

Inc. and the Equity Research Group and their officers, directors and employees shall not be responsible

or liable for any trading decisions, damages or other losses resulting from, or related to, the information,

data, analyses or opinions within the report. The Equity Research Group encourages recipients of this

report to read all relevant issue documents (e.g., prospectus) pertaining to the security concerned,

including without limitation, information relevant to its investment objectives, risks, and costs before

making an investment decision and when deemed necessary, to seek the advice of a legal, tax, and/or

accounting professional.

The Report and its contents are not directed to, or intended for distribution to or use by, any person or

entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where

such distribution, publication, availability or use would be contrary to law or regulation or which would

subject Morningstar, Inc. or its affiliates to any registration or licensing requirements in such jurisdiction.

Where this report is made available in a language other than English and in the case of inconsistencies

between the English and translated versions of the report, the English version will control and supersede

any ambiguities associated with any part or section of a report that has been issued in a foreign

language. Neither the analyst, Morningstar, Inc., or the Equity Research Group guarantees the accuracy

of the translations.

This report may be distributed in certain localities, countries and/or jurisdictions (“Territories”) by

independent third parties or independent intermediaries and/or distributors (“Distributors”). Such

Distributors are not acting as agents or representatives of the analyst, Morningstar, Inc. or the Equity

Research Group. In Territories where a Distributor distributes our report, the Distributor is solely



responsible for complying with all applicable regulations, laws, rules, circulars, codes and guidelines

established by local and/or regional regulatory bodies, including laws in connection with the distribution

third-party research reports.

Conflicts of Interest

× No interests are held by the analyst with respect to the security subject of this investment

research report.

× Morningstar, Inc. may hold a long position in the security subject of this investment research

report that exceeds 0.5% of the total issued share capital of the security. To determine if

such is the case, please click http://msi.morningstar.com and http://mdi.morningstar.com.

× Analysts’ compensation is derived from Morningstar, Inc’s overall earnings and consists of salary, bonus

and in some cases restricted stock.

× Neither Morningstar, Inc. or the Equity Research Group receives commissions for providing research nor

do they charge companies to be rated.

× Neither Morningstar, Inc. or the Equity Research Group is a market maker or a liquidity provider of the

security noted within this report.

× Neither Morningstar, Inc. or the Equity Research Group has been a lead manager or co-lead manager

over the previous 12-months of any publicly disclosed offer of financial instruments of the issuer.

× Morningstar, Inc’s investment management group does have arrangements with financial institutions to

provide portfolio management/investment advice some of which an analyst may issue investment

research reports on. However, analysts do not have authority over Morningstar’s investment

management group’s business arrangements nor allow employees from the investment management

group to participate or influence the analysis or opinion prepared by them.

× Morningstar, Inc. is a publicly traded company (Ticker Symbol: MORN) and thus a financial institution

the security of which is the subject of this report may own more than 5% of Morningstar, Inc’s total

outstanding shares. Please access Morningstar, Inc.’s proxy statement, “Security Ownership of Certain

Beneficial Owners and Management” section

http://investorrelations.morningstar.com/sec.cfm?doctype=Proxy&year=&x=12

× Morningstar, Inc. may provide the product issuer or its related entities with services or products for a fee

and on an arms’ length basis including software products and licenses, research and consulting services,

data services, licenses to republish our ratings and research in their promotional material, event

sponsorship and website advertising.



Further information on Morningstar, Inc’s conflict of interest policies is available from

http://global.morningstar.com/equitydisclosures. Also, please note analysts are subject to the CFA

Institute’s Code of Ethics and Standards of Professional Conduct.

For a list of securities which the Equity Research Group currently covers and provides written analysis on

please contact your local Morningstar office. In addition, for historical analysis of securities covered,

including their fair value estimate, please contact your local office.

For Recipients in Australia

This Report has been issued and distributed in Australia by Morningstar Australasia Pty Ltd (ABN: 95

090 665 544; ASFL: 240892). Morningstar Australasia Pty Ltd is the provider of the general advice (‘the

Service’) and takes responsibility for the production of this report. The Service is provided through the

research of investment products. To the extent the Report contains general advice it has been prepared

without reference to an investor’s objectives, financial situation or needs. Investors should consider the

advice in light of these matters and, if applicable, the relevant Product Disclosure Statement before

making any decision to invest. Refer to our Financial Services Guide (FSG) for more information at

http://www.morningstar.com.au/fsg.pdf.

For Recipients in Hong Kong

The Report is distributed by Morningstar Investment Management Asia Limited, which is regulated by

the Hong Kong Securities and Futures Commission to provide services to professional investors only.

Neither Morningstar Investment Management Asia Limited, nor its representatives, are acting or will be

deemed to be acting as an investment advisor to any recipients of this information unless expressly

agreed to by Morningstar Investment Management Asia Limited. For enquiries regarding this research,

please contact a Morningstar Investment Management Asia Limited Licensed Representative at

http://global.morningstar.com/equitydisclosures.

For Recipients in India

This Investment Research is issued by Morningstar Investment Adviser India Private Limited.

Morningstar Investment Adviser India Private Limited is registered with the Securities and Exchange

Board of India (Registration number INA000001357) and provides investment advice and research.

Morningstar Investment Adviser India Private Limited has not been the subject of any disciplinary action

by SEBI or any other legal/regulatory body. Morningstar Investment Adviser India Private Limited is a

wholly owned subsidiary of Morningstar Investment Management LLC. In India, Morningstar Investment

Adviser India Private Limited has one associate, Morningstar India Private Limited, which provides data

related services, financial data analysis and software development. The Research Analyst has not served

as an officer, director or employee of the fund company within the last 12 months, nor has it or its

associates engaged in market making activity for the fund company.

*The Conflicts of Interest disclosure above also applies to relatives and associates of Manager Research

Analysts in India.



# The Conflicts of Interest disclosure above also applies to associates of Manager Research Analysts in

India. The terms and conditions on which Morningstar Investment Adviser India Private Limited offers

Investment Research to clients, varies from client to client, and are detailed in the respective client

agreement.

For recipients in Japan

The Report is distributed by Ibbotson Associates Japan, Inc., which is regulated by Financial Services

Agency. Neither Ibbotson Associates Japan, Inc., nor its representatives, are acting or will be deemed to

be acting as an investment advisor to any recipients of this information.

For recipients in Singapore

For Institutional Investor audiences only. Recipients of this report should contact their financial adviser in

Singapore in relation to this report. Morningstar, Inc., and its affiliates, relies on certain exemptions

(Financial Advisers Regulations, Section 32B and 32C) to provide its investment research to recipients in

Singapore.



About Morningstar Manager Research

Morningstar Retirement Manager provides independent, fundamental equity research differentiated by

a consistent focus on sustainable competitive advantages.

For More Information

+852 2973 4623

Wing Chan

Director of Manager Research, Asia

[email protected]

Unit 6809, The Center

99 Queenʼs Road Central

Hong Kong

©2017 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the

country in which its original distributor is based. The information, data, analyses, and opinions presented herein do not constitute

investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are

not warranted to be correct, complete, or accurate. The opinions expressed are as of the date written and are subject to change

without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages, or

other losses resulting from, or related to, the information, data, analyses, or opinions or their use. References to “Morningstar

Credit Ratings” refer to ratings issued by Morningstar Credit Ratings, LLC, a credit rating agency registered with the Securities and

Exchange Commission as a nationally recognized statistical rating organization (“NRSRO”). Under its NRSRO registration,

Morningstar Credit Ratings issues credit ratings on financial institutions (e.g., banks), corporate issuers, and asset-backed

securities. While Morningstar Credit Ratings issues credit ratings on insurance companies, those ratings are not issued under its

NRSRO registration. All Morningstar credit ratings and related analysis are solely statements of opinion and not statements of fact

or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Morningstar credit ratings

and related analysis should not be considered without an understanding and review of our methodologies, disclaimers, disclosures,

and other important information found at https://ratingagency.morningstar.com. The information contained herein is the

proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior

written consent of Morningstar. To license the research, call +1 312 696-6869.

https://ratingagency.morningstar.com/

Mind the Gap - Asia 2017

Documents

Transcript of Mind the Gap - Asia 2017