New Ratings
Kames Absolute Return Bond – Neutral
Ashis Dash
The Kames Absolute Return Bond Fund has been managed by two experienced managers, Stephen Snowden and Colin Finlayson, since its inception in September 2011. The managers dynamically allocate across three modules – carry, credit and rates – with the aim of delivering 3-month GBP LIBOR + 2-3% net of fees over rolling three-year periods while minimising volatility and correlation to broader fixed income markets.
The fund has done a good job at limiting drawdowns and volatility while also exhibiting lower correlations with major fixed income markets. However, it has struggled to beat cash + 2%, the lower end of its outperformance target and a more realistic aim in the current low yield environment, over most rolling three-year periods since inception. Moreover, its clean share class’ fee of 0.68%, which is almost a third of the alpha target, is an additional hurdle. These limit our conviction in the fund despite the experienced team and structured process.
M&G European Strategic Value – Bronze
Mathieu Caquineau
Richard Halle has long experience in European equities and has spent most of his 18-year career at M&G. He designed this value-oriented strategy and has been managing it since its launch in 2008 with convincing results. Halle’s approach combines a strict quantitative screening process to identify the cheapest stocks in each sector, while thorough bottom-up fundamental analysis is used to avoid value traps. The resulting portfolio is diversified across sectors and countries, with stock selection being the main performance driver. Overall, we believe the manager has the required experience and proven skills to keep serving investors well in the long-run.
Downgrades
Investec UK Special Situations – Silver
Simon Dorricott
Investec UK Special Situations has many positive attributes, but a re-assessment of the approach has caused us to reduce the rating from the highest level. The strict process and its implementation have combined to cause medium term returns to be lacklustre versus other value orientated funds. The lack of ideas passing the screening process and the manager’s valuation criteria, have been the cause of this together with some stock selection issues. Although the process has not been as resilient as hoped in recent times, the long term record remains good and we continue to have high regard for the manager and the approach. We have, however, reduced the rating from Gold to a Morningstar Analyst Rating of Silver which is a better reflection of our current views.
Kames Strategic Bond – Bronze
Ashis Dash
The fund is run by an experienced team of four managers led by Kames' head of fixed income, David Roberts. They aim to outperform the IA Sterling Strategic Bond sector average over rolling three year periods. To that end, they invest across global fixed income markets, though the execution of the investment process has been less convincing in recent years. The fund beats its IA peer group in less than 10% of the rolling three year periods since 2010, while its three-, five-, and ten-year returns through February 2017, both absolute and risk-adjusted, have dropped to the bottom half within its Morningstar Category.
The fund’s underweight duration versus peers held since 2011 has broadly detracted over the years. Meanwhile, contributions from other return drivers such as asset allocation, sector and credit selection, haven’t been able to totally offset this. That’s disappointing given the multiple performance drivers available to the managers, and somewhat reduces our conviction on the quality of execution of the investment process. Thus, we no longer consider this fund as one of the best in its peer group, although its experienced team still plays in its favour.
Temple Bar (TMPL) – Silver
Simon Dorricott
Temple Bar has many positive attributes, including low costs, but a re-assessment of the approach has caused us to reduce the rating from the highest level. The strict process and its implementation have combined to cause medium term returns to be lacklustre versus other value orientated funds. The lack of ideas passing the screening process and the manager’s valuation criteria, have been the cause of this together with some stock selection issues. Although the process has not been as resilient as hoped in recent times, the long term record remains good and we continue to have high regard for the manager and the approach. We have, however, reduced the rating from Gold to a Morningstar Analyst Rating of Silver which is a better reflection of our current views.
JOHCM UK Opportunities – Neutral
Samuel Meakin
We have assigned JOHCM UK Opportunities a Morningstar Analyst Rating of Neutral. The fund had recently been placed under review following the announcement that lead manager John Wood would be retiring from the investment management industry at the end of September 2017. The fund was previously rated Silver. While we believe that existing co-managers Michael Ulrich and Rachel Reutter, who will jointly take the helm after Wood’s departure, are of a high pedigree, we also think that Wood added value in a number of key areas, and we would like to see more evidence that the new management pairing can match his discipline in executing the investment process.
Ratings moved to Under Review
BlackRock Global Funds Global SmallCap
Peter Brunt
BlackRock has restructured the team running this fund. It will be run by Kevin Franklin and Raffaele Savi of the group’s San Francisco-based Scientific Active Equity (SAE) team. The fund will follow the current investment approach until 28 April 2017, during which time the former managers, John Coyle and Murali Balaraman, will assist in the transition to the SAE team. While the portfolio will be managed to the same investment guidelines, the change in management marks a significant change in investment approach – the SAE team follows a heavily data-driven, quantitative strategy. We are therefore placing the fund's rating Under Review until we have spoken with the new managers to better understand exactly how the fund will be managed.
BlackRock Global Funds US Basic Value
Fatima Khizou
BGF US Basic Value's Morningstar Analyst Rating is Under Review because BlackRock is replacing its lead manager and combining its investment team with that of another fund as part of a broad and dramatic restructuring of its active equity lineup.
Bart Geer, who has run this fund since defecting to BlackRock from Putnam Investments in late 2012, will leave the fund and firm later this year. His current comanager, Carrie King, a holdover from previous manager Kevin Rendino’s team and a listed manager on this fund since 2009, will take over the portfolio with Joe Wolfe, a BlackRock employee since 2012 and former head of active quantitative research at Northern Trust. Wolfe helped Geer rebuild the quantitative screens he used at Putnam when he came to BlackRock.
King will continue to employ that process, which relied on both quant and fundamental techniques to pick stocks. But she will do it as part of a larger "Income and Value" team constructed around the crew running BlackRock Equity Dividend, rather than as a separate Basic Value team. As part of that integration, Basic Value analysts Bill Rubin, who had been with the team since 2011, and Eugene Rogovoy, who Geer hired in 2013, will leave the firm. Andrew Wright, who had been a member of the Basic Value team since 2013 and a BlackRock employee since 2009, will join King and Wolfe on the Income and Value team.
Geer's approach produced mixed results here but had a longer successful track record at Putnam Equity Income. Combining quantitative screens and fundamental research is not an unusual strategy, but Geer exerted an unusual amount of control over the process here, and it is not clear how it will fare without his judgment and experience. King is seasoned but accumulated most of her experience with Rendino's purely fundamental, contrarian approach.
