Morningstar Fund Ratings: Weekly Round-up

ANALYST RATINGS: This week, fund analysts reveal new ratings for Lyxor and USB passive funds, upgrades for Pictet and Polar Capital and a downgrade iShares

Morningstar Analysts 23 October, 2017 | 1:05PM

New Ratings

Lyxor MSCI AC Asia Pacific ex-Japan ETF C-EURNeutral

Kenneth Lamont

High fees and structural geographic biases mean that we have little confidence in the ability of this fund to outperform its category peers over the long term. With an ongoing charge of 0.60%, the fund is considerably more expensive than comparable passive offerings. Also, despite being relatively broad, the MSCI AC Asia Pacific Ex-Japan index suffers from a significant structural bias toward China relative to peers in the Asia Pacific ex Japan Morningstar Category, making the fund an imperfect tool with which to access that market.

UBS ETF MSCI EMU SRI EUR A DisBronze

Kenneth Lamont

We have initiated coverage of this fund with a Bronze rating based on our confidence in MSCI’s ESG screening process applied to an index that has proven hard to beat by active managers. By sampling an ESG-compliant sub-set of stocks in each sector, this fund retains the strengths of its parent MSCI EMU Index. The sector constraints help to avoid the persistent sector biases which typically plague ESG funds, while the 5% single stock cap reduces single holding concentration.

Vanguard Pacific ex-Japan Stock IndexNeutral

Kenneth Lamont

This fund's narrow and geographically biased exposure makes it an imperfect vehicle through which to access Asia-Pacific Ex-Japan equities. A large structural overweight to Australia and the fund’s exclusion of important Asian counties such as China and South Korea mean that we have little confidence in the ability of this fund to outperform category peers over the long term.

Upgrades

Pictet-Asian Local Currency DebtBronze

Don Yew

We have upgraded the Morningstar Analyst Rating of Pictet-Asian Local Currency Debt to Bronze from Neutral. This is predicated on our increased conviction in long-tenured and experienced comanagers Wee-Ming Ting and Philippe Petit, who have managed the fund together since July 2007 and delivered strong peer-relative returns. Carrie Liaw joined Ting and Petit in the Singapore office in May 2015 and we consider her to be a valuable addition to the compact team. The fund utilises an unconventional but well-established investment process that is employed across Pictet’s emerging-markets-debt strategies, including the Bronze-rated Pictet Emerging Local Currency Debt fund, and has been tested over market cycles.

Polar Capital Global TechnologySilver

Samuel Meakin

Over time, our conviction in this strategy has grown as the experienced managers, backed by a well-resourced team, have continued to demonstrate consistency in their well-established approach and strength in their thematic and stock-specific analysis. They seek to add value by identifying disruptive growth areas within the sector and finding the companies best placed to profit from these emerging themes. We consider the fund a strong offering for investors seeking to benefit from the long-term growth prospects of the sector.

Robeco Emerging Markets EquitiesSilver

Mathieu Caquineau

This fund is in the hands of a very experienced emerging-markets skipper. Wim-Hein Pals has accumulated almost three decades of experience, mostly spent managing equity portfolios invested in emerging markets at Robeco. He is supported by a stable bench of experienced analysts and fund managers. The fund delivered underwhelming results from 2010 to 2013, but we think the fund manager effectively tackled the issue by taking a more active stance.

The portfolio is more concentrated, and its active share has gained 20% in the past five years with a positive effect on performance. With the same disciplined process blending top-down country allocation with bottom-up stock selection, we believe that Robeco Emerging Markets Equities has more potential than before.

Robeco Euro Credit BondsSilver

Niels Faassen

Lead manager Victor Verberk has managed this fund since January 2008. He is supported by two comanagers with whom he forms a close-knit and experienced investment-grade credit team. The investment process is a combination of top-down beta positioning (that is, management of the portfolio’s market sensitivity) and bottom-up security selection, with an emphasis on the latter. It allows the managers considerable freedom to invest based on their level of conviction. All in all, Verberk’s sometimes bold approach has paid off, which strengthens our confidence in this fund.

Downgrades

iShares EURO STOXX (DE) ETFSilver

Kenneth Lamont

This ETF remains a strong investment proposition. However, pending changes to the German tax system are expected to lower reported fund returns. The full impact of this has yet to be observed. Considering this uncertainty, we have signalled our lower level of confidence by downgrading the fund from a Gold to a Silver rating. The fund remains one of the broadest and cheapest within its direct peer group, which has seen the fund perform strongly against surviving peers over 3, 5 and 10 years on a risk-adjusted basis.

Polar Capital Emerging Markets IncomeNeutral

Simon Dorricott

One of the positive aspects of this fund was the fact that the three senior team members had all worked together for a significant period of time. With the departure of Neil Denman, this factor has diminished and, with a team of just three individuals, resources are now a little light in comparison with peers. In addition, the flexibility of the mandate in terms of stock-level yields has not quite delivered the consistency of returns we would have hoped for. We still recognise the longer-term performance track record and the experience of the manager William Calvert, but the pricing of the fund tips the balance towards a Neutral rating at this time: the ongoing charges are high compared with peers and on top of this there is a performance fee.

Scottish American OrdNeutral

David Holder

In August 2017, Baillie Gifford announced that Dominic Neary, longstanding comanager of Scottish American Investment Trust and head of the Baillie Gifford Global Income Growth team, was leaving the business. James Dow and Toby Ross retain their positions as comanagers and have been appointed as co–heads of the team. They are joined by new team member, Vera German, who will serve as comanager.

Following a recent interview with Dow and Ross, we are reassured that investors can expect continuity of investment approach. However, we believe Neary’s departure is material, given the loss of his experience to the team. In recognition of the changing dynamic within the team, we feel it appropriate to award the fund a Morningstar Analyst Rating of Neutral.

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.

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