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SQM Research Ratings Update
December 2020
Our Ratings & Fund Data Service covers Sector Reviews, Fund research & Quantitative analysis for about 9000 funds. For more information contact us today! Get the right information & insightful advice first from SQM Research.  To subscribe to our Ratings and Funds Data Service, click HERE.

Capital v Income: Careful What You Wish For
by Rob da Silva, Head of Research

The unrelenting search for yield continues unabated. In a world where cash rates are essentially zero or negative in most developed economies investors are finding it increasingly difficult to find the income they need from their investments. The lack of conventional sources has seen a meaningful migration of retail money towards less traditional sources – up the risk spectrum to high yield and income focused equity strategies, direct property, direct lending, and a tropical fruit salad (i.e., wide variety) of alternatives strategies.
For investors on this journey, we think it is helpful to point out the difference between income and distributions. In the managed fund world, they are not the same thing. Investors should not think that the cash flow coming to them from managed funds is essentially income as typically understood i.e., dividends, coupons, interest and so on. It might be, but it varies widely. For example, high distributions may reflect strong realized capital gains that are being paid out. That is fine in the sense that you can still feed your family on distributions whether they are capital gains or income. BUT they have different tax consequences and different reliability profiles. Capital gains might by lumpy and not always there when you need them. The taxes imposed on those gains may be coming at an inopportune time and/or be a material drag on outcomes.
Nevertheless, folks are attracted to high distributions regardless of the makeup so we thought we would investigate the topic a little.
We have taken a look at 77 funds across 7 categories as listed below:

   1. Equity Australia Large Growth
   2. Equity Australia Large Blend
   3. Equity Australia Large Value
   4. Equity Australia Derivative Income
   5. High Yield Credit
   6. Australian Short Term Fixed Interest
   7. Bonds - Australia
The chart below shows (no surprise!) that Growth has outperformed Value and the more agnostic Blend category. Value has in fact been half (or lower) the returns of Growth both over 3 and 5 years. Equity Derivative Income has done about as poorly as Value while the Fixed Income Sectors are a little lower again.

From an Income (i.e., distribution cash flow) the results look like this:

The positions for the equity categories are somewhat reversed i.e., Equity Derivative Income the best, followed by Value, then Blend and finally, Growth.
Income-hunters will find this interesting – however our last chart provides a twist in the tale.

The higher “income” comes at the cost of poor capital returns – extremely poor. Only the Growth category escapes this conundrum. It appears that chasing income comes at the cost of growth opportunities – and that cost can be considerable. Of course, the focus on income naturally intertwines itself with the value factor, which has been underperforming severely for many years now. This may not always be the case in the future.
Nevertheless, those who are interested in income strategies should at least be aware of and consider the effects of the trade-off with capital returns (and so total outcomes).
And finally... from the entire team at SQM Research we wish our clients, readers, colleagues, family, and friends the very best for Christmas and look forward to a much-improved New Year.


Recently Published Reports

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SQM Research's Top 5 SQM Rated Funds* - 30 November 2020

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* Any Funds in this table that have international investments will have different hedging patterns, from hedged to unhedged or variable hedging. This may have an impact on fund returns. Please refer to the Fund's product disclosure statement for details.

SQM Research's Top 50 ETFs - 30 November 2020
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SQM Research's Market Benchmarks - 30 November 2020

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Ratings Table
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For further information: 
Rob da Silva - Head of Research, SQM Research - Tel: (02) 9220 4606   Email:
Louis Christopher - Managing Director, SQM Research - Tel: (02) 9220 4666  Email:

About SQM Research 
SQM Research is an independent property advisory, ratings and forecasting research 
house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors. For more information please visit

Research Methodology
In general, the assessment approach adopted by SQM Research incorporates a combination of qualitative and quantitative research techniques to assess property investment products. Information generated is passed through the SQM Research assessment model at the completion of the assessment process. The assessment model generates a product score, which correlates to a specific star rating (out of a maximum of five stars). Each star rating covers a scoring range, allowing products to be ranked within quarter star increments.
 Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:
4.5 stars and above - Outstanding. Highly suitable for inclusion on APLs.
4.25 stars - Superior. Suitable for inclusion on most APLs.
4 stars - Superior. Suitable for inclusion on most APLs.
3.75 stars - Favourable. Consider for APL inclusion.
3.5 stars - Acceptable. Consider for APL inclusion.
3.25 stars - Caution required. Not suitable for APLs.
3 stars - Strong caution required. Not suitable for APLs.
Below 3 stars – Avoid or redeem. Not suitable for APLs.
Hold - Rating is suspended until SQM Research receives further information. A rating is typically put on hold for a period of two days to four weeks.
Withdrawn - Rating no longer applies. Significant issues have arisen since the last report date. Investors should consider avoiding or redeeming units in the fund..
 * The definitions above are not all encompassing and not all individual items mentioned will necessarily be relevant to the rated Fund. Users should read the current rating report for a comprehensive assessment.

The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.
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