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Morningstar Fund Ratings: Weekly Round-up

ANALYST RATINGS: Fund analysts reveal new ratings for three ETFs and why they downgraded funds from Aberdeen, BlackRock and Scottish American Trust

Morningstar Analysts 21 August, 2017 | 3:10PM

New Ratings

iShares PfandbriefeNeutral

Jose Garcia-Zarate

Investors solely seeking exposure to the German Pfandbriefe market may find that this German-domiciled low-cost ETF nicely fits the bill.  It charges a ongoing charge of 0.10% and tracks an index that provides comprehensive coverage of the underlying market.

The fund is efficiently managed and we hold a positive view of the fixed income passive portfolio management team at iShares. However, in the wider context of the EUR-denominated covered bond market, the ETF’s single country exposure makes it more of a tactical investment proposition. For that reason, we award the ETF an Analyst Rating of Neutral.

iShares Euro Covered Bond ETFBronze

Jose Garcia-Zarate

This fund offers investors comprehensive exposure to an asset class regarded as amongst the safest within the fixed-income universe.  The index it tracks provides coverage of the euro-denominated covered bond market irrespective of issuers' domicile, thus including both eurozone and non-eurozone countries. The ETF comes with an ongoing charge of 0.20%. However, its tracking difference is now routinely below it. We have a positive opinion of the fixed income passive portfolio management team at iShares. The combination of breadth of coverage and low-cost makes this fund a solid proposition for investors seeking exposure to this market.

PowerShares EQQQ Nasdaq-100 ETFNeutral

Monika Dutt

The PowerShares Nasdaq 100 currently allocates 55%-60% of its portfolio toward technology stocks. Aside from its strong sector concentration, about 50% of this fund's weighting sits in the top 10 holdings, including Apple, Microsoft, Amazon, and Facebook. As such, the fund doesn't represent a compelling long-term investment proposition. It is only suitable as a tactical tool to tilt a portfolio’s equity exposure towards US technology companies. For these reasons, we have awarded it a Morningstar Analyst Rating of Neutral.

Upgrades

JPMorgan ASEANSilver

Mark Laidlaw

The strategy rates strongly across the Morningstar pillars, not least people. Lead manager Pauline Ng is integral to our strong conviction here. She’s been involved with the strategy for over a decade and, in our opinion, her forthright views and insights stand her out against peers. She’s back by a stable team of five who boast detailed coverage across the underlying ASEAN investment universe. The process has been consistently applied and is another positive, in our view.

The team favours firms with favourable industry supply/demand dynamics, significant barriers to entry and show an ability to move up the value chain. The track record has been impressive against both peers and the index, and a favourable fee just adds to the appeal.

Downgrades

Aberdeen Asian Smaller Companies OrdNeutral

Mark Laidlaw

Following the update of Aberdeen Asian Smaller Ord we are downgrading the Morningstar Analyst rating from Gold to Neutral. We believe that, while the strategy has promising elements, it is no longer the standout option that it previously was.

Aberdeen boasts a large and dedicated investment team led by veteran investor Flavia Cheong. The team has a mix of experience but when it comes to specific insights we believe the team is stronger in the large-cap sphere. We like that the investment process is consistent across all equity strategies managed by the firm – long term buy-and-hold based on twin tenets of quality and value.

The track-record here is reasonable, Aberdeen’s willingness to go against the grin can result in periods of sharp underperformance such was the case in 2005. We feel the firm could do a better job for investors on the fee front. By downgrading Aberdeen Asian Smaller (AAS) we are aligning the Morningstar Analyst Rating of Neutral with the similarly managed open-ended SICAV vehicle.

BlackRock European Absolute AlphaNeutral

Fatima Khizou

Vincent Devlin, who had managed these funds since its inception in February 2009, was replaced by David Tovey in June 2017. Stefan Gries, who was appointed to the role of co-manager in July 2013, remains in place. Tovey joined BlackRock, then Merrill Lynch, in 1998 and has held portfolio management responsibilities since 2007. His favoured area of investing has been within the small-cap arena and this bias has been a feature in all the funds where he has been named manager, including the BSF European Opportunities Extension offering and whose track record is the most relevant to this strategy.

However, Tovey’s track record here as lead manager is relatively limited. Additionally, significant changes to the mandate and investment approach of this fund have been made. While we do not necessary view these changes as negative, there are doubts around the new co-managers’ collaboration as well as their implementation of the new approach.  As a result, the funds' Morningstar Analyst Rating is downgraded to Neutral from Bronze.

Ratings Moved to Under Review

Scottish American Investment Trust

David Holder

Baillie Gifford has announced that Dominic Neary, fund manager of Baillie Gifford managed Scottish American Investment Trust and head of the head of the Baillie Gifford Global Income Growth team, has left the business after eight years at the firm.

Neary has worked on the trust since 2009 and was appointed deputy manager in February 2012 and sole manager in February 2014. In July 2016 the board appointed Toby Ross and James Dow as deputy managers on the trust, although in reality as per Baillie Gifford’s team driven process, decision making was collegiate in nature.

Following the announcement of Neary’s departure, James Dow and Toby Ross have been appointed as Co–Heads of the Global Income Growth team and will be Co-Managers of the Scottish American Investment Trust. Vera German has joined the team as an investment manager and there remains an analyst team of three also in place.

Given the collegiate nature of the team, which has been well articulated at our fund manager meetings, investors should not expect a significant change in the process or strategy. The trust held a Morningstar Analyst Rating of Bronze; however, in view of the loss of Neary’s experience we are placing the fund's rating Under Review, pending a meeting with Dow and Ross.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Aberdeen Asian Smaller Ord1,063.00 GBX-0.37
BlackRock European Absolute Alpha D Acc137.20 GBP0.37-
iShares € Covered Bond ETF EUR Dist GBP137.75 GBP-0.61
iShares Pfandbriefe (DE)105.30 EUR0.06
JPMorgan ASEAN (acc) - USD136.43 USD-0.21
PowerShares QQQ ETF155.46 USD1.06
Scottish American Ord369.50 GBX0.72
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Morningstar Analysts   -