Morningstar Fund Ratings: Weekly Round-up

ANALYST RATINGS: This week Morningstar analysts reveal more than 20 new ratings for funds from Aberdeen, BlackRock, Janus Henderson and JP Morgan

Morningstar Analysts 4 January, 2019 | 11:12AM

New Ratings

AB Eurozone Equity Portfolio – Bronze

Ronald Van Genderen

We initiate coverage on AB Eurozone Equity Portfolio with a Morningstar Analyst Rating of Bronze. The fund is managed by lead manager Tawhid Ali since January 2012. He was joined by comanager Andrew Birse in March 2016. Both managers, especially Ali, have long experience in the financial industry. Among others, they both have been analysts within AllianceBernstein’s European Value Equities team.

Currently, as managers of this fund, they are supported by that team, which consists of seven equity analysts and one quantitative analyst. We think both managers are capable and supported by a very experienced, stable, and well-resourced team of analysts. The approach is characterized by a businesslike investing mindset with a focus on companies that are neglected or underappreciated by investors. Their bottom-up process is strong and distinctive by its risk-awareness.

Over Ali’s tenure, the fund has shown a very strong performance, beating both the eurozone large-cap Morningstar Category average and the MSCI EMU benchmark. Finally, one of the few disadvantages of the fund is its relatively high level of fees.

Aberdeen European High Yield Bond – Neutral

Jeroen Siecker

We are initiating coverage of Aberdeen European High Yield Bond Fund with a Morningstar Analyst Rating of Neutral, given that the team running the fund has been working together for a relatively short period and the success of their cooperation is therefore still unproven. The fund has been comanaged by Steven Logan and Ben Pakenham since April 2014. The fund’s process is driven by in-depth bottom-up analysis with a buy-and-hold strategy which illustrates a patient investment approach, resulting in modest portfolio turnover of around 50% per year. The performance under Logan and Pakenham has delivered an attractive return while keeping the risk under control.

AB Select US Equity – Bronze

Natalia Wolfstetter

With its experienced and accomplished lead manager Kurt Feuerman in control at AB Select US Equity, we think investors are in good hands. We initiate coverage of this fund with a Morningstar Analyst Rating of Bronze. Feuerman joined AllianceBernstein in 2011 with about half of his original team at Caxton, where he had been running this U.S. equity strategy since 2005 and a long/short version of the strategy since 2000. Feuerman combines macro and thematic considerations with fundamental company analysis to build his portfolio. This is a discretionary and not overly formalised approach which aims to be very responsive to changes in the market environment in order to limit downside risk. The fund has delivered on this objective, as evidenced by its down capture ratio, which was lower than the Morningstar Category average. We note, however, that the high-turnover process has high execution risk and may not be easily replicable by a less-experienced investor.

Amundi Funds Bond Global Aggregate Fund – Neutral

Mara Dobrescu

We have initiated coverage of the Amundi Funds Bond Global Aggregate fund with a Morningstar Analyst Rating of Neutral. The fund benefits from a duo of experienced managers at the helm since 2014 and 2015, respectively, but changes in the team supporting them give us pause. While the investment strategy is flexible and results over the team’s watch have been encouraging so far, the fund’s above-average costs also limit its appeal.

BGF Global Small Cap – Neutral

Jackie Beard

The new process at this fund is still developing. In April 2017, management transferred to the Scientific Active Equity group; their process is based on a quant model that dates back to 1996 but it’s better known for its success in long-short strategies and US small caps. The team has added some new signals to the model, developed specifically for a global small-cap universe, but results to date have been mixed and they have further work to do.

BGF US Flexible Equity – Neutral

Natalia Wolfstetter

We assign a Morningstar Analyst Rating of Neutral to BGF US Flexible Equity given its still-short lead manager tenure, evolving analyst team, and ongoing process tweaks. In March 2017, Todd Burnside took over the fund together with comanager Joe Wolfe, who helped build the quant screens integral to this fund's process. Both are experienced and can draw on the support of the "income and value" investment team.

This team has been in existence only since March 2017 and comprises members of several recently restructured active equity teams. The team with around 20 members is still coalescing and runs more strategies than before, but it has more resources now than prior to the restructuring. The team's approach also has become more systematic, and it continues to refine its process, which combines both quantitative and fundamental inputs. The team now needs to prove it can deliver consistently improved results.

BGF World Financials – Neutral

Samuel Meakin

We have initiated coverage of BGF World Financials with a Morningstar Analyst Rating of Neutral. Vasco Moreno took over the management of the fund in May 2015. He is an experienced practitioner within the financials space, with more than 20 years covering the sector. When combined with a clearly defined process and a good level of supporting analytical resource, there are several positives here. We would, however, prefer to continue to monitor how the manager implements his approach within the context of this fund, his first long-only mandate, to build further conviction.

BGF World HealthScience – Neutral

David Holder

This strategy benefits from a stable and well-resourced team with portfolio manager Erin Xie having been at the helm here since July 2011. In addition, she has managed healthcare money to good effect since 2003. The process is comprehensive with top down views augmenting bottom up analysis.

As ever with healthcare investment stock analysis is where most value can be added, and this important facet requires a well-resourced investment engine and suitably experienced and specialised individuals, all of which are found here. In our opinion an area for improvement is fees, but this aside we feel that this strategy offers investors a reasonable option for core Healthcare investment. At this stage we initiate coverage with a Morningstar Analyst Rating of Neutral.   

Dimensional UK Core Equity Fund – Silver

Dimitar Boyadzhiev

The low-cost Dimensional UK Core Equity offers comprehensive exposure to UK stocks. The fund overweights stocks with lower valuations, smaller market capitalizations, and higher profitability based on research showing that stocks with those characteristics have tended to outperform over the long term.  As a result, it achieves good balance between a smaller-company tilt and quality characteristics. We expect the fund to continue producing superior risk-adjusted returns relative to peers and have awarded it a Morningstar Analyst Rating of Silver.

Franklin Global Real Estate – Negative

Ronald Van Genderen

We initiate coverage on Franklin Global Real Estate with a Morningstar Analyst Rating of Negative. Wilson Magee is the lead manager on this fund and head of the global real estate and infrastructure equities team. He is a very experienced manager with 32 years of industry experience, most of which has been in or related to the real estate markets.

Magee heads a team of four managers. We think this team is reasonably well-resourced and experienced, and we value its stability. The team applies both a quantitative and qualitative approach in finding high-quality property stocks. Although the process overall appears to be solid and comprehensive, to our opinion, in portfolio construction there is little leeway for the managers to implement their investment ideas with high conviction.

In combination with the cost level of the fund being above average, this puts the fund at a disadvantage. Indeed, over the tenure of Magee, the fund has shown a long-term risk-adjusted underperformance versus both the FTSE EPRA Nareit Developed benchmark and the property–indirect global Morningstar Category average. Especially versus the benchmark, the underperformance has been significant and consistent.

GAM Star Credit Opportunities Fund – Neutral

Mara Dobrescu

We have initiated coverage of the GAM Star Credit Opportunities fund (USD) with a Morningstar Analyst Rating of Neutral. This fund has some appealing features through the experience of its manager duo. Anthony Smouha and Grégoire Mivelaz have manned this fund since its inception in 2011, but Smouha had been investing in subordinate debt since the infancy of this asset class in the late 1980s. This fund is destined to capture the higher income offered by subordinate debt issued by financial and, to a lesser extent, nonfinancial companies.

This version of the strategy focuses on USD-denominated bonds--this makes it stand out compared with other subordinate debt funds, most of which are focused on EUR credits. Despite a solid investment philosophy, the absence of a formal performance objective and the fund’s high price tag make it difficult to recommend for the long term.

MFS Meridian Prudent Wealth Fund – Silver

Francesco Paganelli

We have initiated coverage of MFS Meridian Prudent Wealth fund with a Morningstar Analyst Rating of Silver. Lead manager Barnaby Wiener’s proven stock-picking skill, long experience, and access to MFS’ large equity research platform provide an edge over its competitors.

The manager employs a distinctive investment philosophy and a multilayered risk-management process, combining a preference for high-quality stocks, the flexibility to reduce the fund’s equity exposure when opportunities are scarce, and a protective put option overlay strategy. The fund’s and the manager’s excellent track record give further reasons for confidence, whereas the fund’s fees are in line with the peer group’s average.

Natixis Europe Smaller Companies – Neutral

Ronald Van Genderen

We initiate coverage on Natixis Europe Smaller Companies with a Morningstar Analyst Rating of Neutral. Thierry Cuypers is the lead manager for this fund and head of Ostrum’s Small & Mid-Caps Europe team. The team consists of four managers, who also carry analyst responsibilities organized according to countries. The team has been very stable, and the team members are all very experienced.

However, the team is responsible for managing five strategies in total with limited overlap, which leads to a hefty workload. The process is characterized by a quality growth-at-a-reasonable-price approach, which has been in place since Cuypers took over at the helm. We think the process has been largely dependent on the experience and knowledge of the managers in the past. Although this has been beneficial to the fund, we are held back in our conviction as the process has been largely unformalized and the team only started to more document the process and its research in 2018.

Over the tenure of Cuypers, the fund has easily outperformed the Europe mid-cap equity Morningstar Category average but was slightly behind relevant indexes such as its MSCI Europe Small Cap benchmark and the MSCI Europe Small Growth Index. Finally, the fund has ongoing charges that are much higher compared with the median of a peer group of nonrebate share classes among Europe equity funds.

Janus Henderson Horizon Euroland – Neutral

Ronald Van Genderen

We initiate coverage on Janus Henderson Horizon Euroland with a Morningstar Analyst Rating of Neutral. Nick Sheridan is the sole decision-maker for this fund. He is a very experienced and opinionated manager, and we value his personal investment in the fund. Although Sheridan sits within the Janus Henderson Pan European Equities team, he doesn’t rely on it in practice.

Given that he is also managing Janus Henderson Horizon Pan European Dividend Income Fund and is involved with Janus Henderson International Small Cap, this holds us back in our conviction as his workload seems to be hefty. At the heart of the process is a proprietary analytical model to provide theoretical values for each stock in the investment universe. The process is time-tested, as it had been developed by Sheridan at his previous employers. To our opinion, it is also well-thought-through and, given the importance of the screening, methodical and repeatable.

Sheridan has put in place a strong risk-adjusted track record, beating both the eurozone large-cap equity Morningstar Category average and the MSCI EMU benchmark over his tenure. A negative element is the fund’s high ongoing charges, which can further increase as there is a performance fee in place.

Janus Henderson Horizon Global Technology – Neutral

Samuel Meakin

We have initiated coverage of Janus Henderson Horizon Global Technology with a Morningstar Analyst Rating of Neutral. Since the departure of previous lead manager Stuart O’Gorman in September 2017, the fund has been managed by Alison Porter, Graeme Clark, and Richard Clode. This is a benchmark-aware strategy relative to other active funds in the sector.

When considered alongside active peers that take more risk relative to the index, this arguably lessens the opportunity to outperform the benchmark after fees over the longer term. O’Gorman’s departure signified a material loss of experience from the management team that, when considered with the structure of the approach, leads us to a Morningstar Analyst Rating of Neutral for now.

Janus Henderson Horizon Japanese Smaller Companies – Neutral

Ronald Van Genderen

We initiate coverage on Janus Henderson Horizon Japan Smaller Companies with a Morningstar Analyst Rating of Neutral. Yunyoung Lee has been managing this fund as of his arrival at Janus Henderson in May 2005, and he has been the sole manager ever since. He has 22 years of experience in the financial industry, all related to Japanese equities. Next to this fund, Lee is comanaging the US-domiciled Janus Henderson International Small Cap.

The overlap between the two funds is limited, and, even though Lee has been receiving support from a dedicated analyst since July 2016, we think him to be very light in resources, especially as his approach, which is centered around identifying catalysts in companies as a key driver of investments, largely depends on time-consuming company meetings.

We think the fundamental research framework to be light, but of lesser importance here, as the lead manager very much relies on company meetings. However, this reliance also makes the process difficult to apply consistently, in our view.

Still, over the full tenure of Lee, the risk-adjusted performance of the fund has been outstanding versus the Japan small/mid-cap equity Morningstar Category and the Russell/Nomura Small Cap Index. A negative element is the fund’s high ongoing charges, which can further increase as there is a performance fee in place.

JPM Global Balanced – Bronze

Francesco Paganelli

We have initiated coverage of JPM Global Balanced with a Morningstar Analyst Rating of Bronze. This benchmark-oriented global multi-asset strategy benefits from a strong platform of managers. Gareth Witcomb, Katy Thorneycroft, and Jonathan Cummings are the fund’s lead portfolio managers, though this fund follows a team approach to execute its process, and benefits from the quantitative and qualitative inputs of JPM’s wider multi-asset group.

The process rests on tactical asset-allocation calls, security selection in bonds and equities, and currency bets to add value relative to the benchmark. The fund’s equity sleeve is run by JPM’s four regional equity teams; US, Europe, Asia-Pacific, and emerging markets, whose quality is generally high. All in all, the fund rests on solid fundamentals, providing access to a strong organization with expertise in multiple areas of the market, at a reasonable cost.

Pictet-Global Megatrend Selection – Bronze

Ronald Van Gendereen

We initiate coverage on Pictet-Global Megatrend Selection with a Morningstar Analyst Rating of Bronze. Hans Peter Portner is the named manager for this fund. However, because this is a multi-strategy fund, our evaluation rests on the broader thematic equities team. As of November 2018, Pictet’s Thematic Equities team consists of 31 members. Although it is extensive in total numbers, we think some teams remain relatively small as some strategies are managed by only two managers

In 2018, the team lost four experienced portfolio managers. This triggered several changes within the team. The recent departures and the changes that these departures triggered reduce our overall conviction here. Investments in the underlying strategies are done in principle on an equal-weighted basis. The underlying thematic strategies are all managed according to the same bottom-up, well-structured, and repeatable process.

As of December 2018, this fund is invested in the health, premium brands, digital, security, robotics, water, clean energy, timber, nutrition, and smart city strategies. Since inception of the fund, it is well ahead of the global flex-cap equity Morningstar Category average and its MSCI World benchmark. Finally, a disadvantage of the fund is its above-average fee level.

Schroder ISF Frontier Markets Equity – Neutral

Lena Tsymbaluk

Rami Sidani has been the lead manager on Schroder ISF Frontier Markets Equity since its inception in December 2010. Sidani is supported by three dedicated frontier-markets analysts, who have worked with him since inception, and the wider emerging-markets resources at Schroders. The fund leverages the group’s established and methodical emerging-markets process that combines top-down and bottom-up research and takes a proactive approach to risk management.

However, compared with the core emerging-markets process, the implementation of the top-down element here is more flexible owing to the nature of frontier markets, and there is a stronger emphasis on bottom-up research. The latter emphasises a qualitative assessment from company meetings and discounted cash flow valuation analysis. While there are clear positives here, the fund’s overall attractiveness is reduced by an expensive fee structure that incorporates a performance fee of 15%.

We will continue to monitor the fund in order to better understand the team’s fundamental stock research and to ensure its consistent implementation. For now, we award the fund a Morningstar Analyst Rating of Neutral. Investors should be aware the strategy has been soft-closed since 2015.

Schroder ISF Global Convertible Bonds – Bronze

Mara Dobrescu

We have initiated coverage of the Schroder ISF Global Convertible Bonds fund with a Morningstar Analyst Rating of Bronze. The fund benefits from a very experienced portfolio manager, Peter Reinmuth, at its helm for the past decade. While supporting resources are fairly slim, the team has successfully plied the fund’s straightforward bottom-up approach over time, enabling the fund to significantly outperform its category peers as well as its benchmark index over the past 10 years.

Schroder ISF Global Inflation Linked Bond Fund – Neutral

Louise Babin

We have initiated coverage of the Schroder ISF Global Inflation Linked Bond fund with a Morningstar Analyst Rating of Neutral.  The strategy boasts an experienced team and distinct global multisector process that makes good use of the firm’s wide-ranging resources, though it has yet to prove its ability to deliver benchmark-beating returns over the long term.  A recent reduction in the management fee should help but is not significant enough to leave the fund competitively priced. 

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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