Fund Rating Downgrades: High Fees and Poor Performance

FUND RESEARCH UPDATE: Morningstar OBSR analysts have downgraded several fund ratings recently, citing expensive fees and poor performance amongst other reasons

Holly Cook 28 March, 2013 | 5:51PM
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Morningstar OBSR analysts have downgraded several funds and launched new ratings on a handful more, with expensive fees, manager changes and poor performance among the reasons for the downgrades.

Fund Rating Downgrades

Allianz Little Dragons – Too Expensive

We have downgraded the Allianz Little Dragons fund to a Morningstar OBSR Analyst Rating of Neutral from its previous rating of Bronze. Although we still believe the manager and process are sound, we have taken the decision to downgrade the rating based on the fund’s relatively high total expense ratio. In our opinion, the high cost is a disadvantage and the fund has not been delivering the outperformance that is commensurate with the expenses investors are charged. 

JPMorgan Emerging Markets Infrastructure – Manager Change

Our rating on JPMorgan Emerging Markets Infrastructure Equity fund has been downgraded to Neutral, having previously been under review due to a change in lead manager. Richard Titherington, the fund’s previous manager, has stepped back and is taking a co-manager role. Leon Eidelman, who has been involved in the emerging markets infrastructure strategy for institutional clients since August 2007, is now the lead manager. While we acknowledge the new manager’s prior involvement in the strategy, he has limited accountability for the fund’s public track record. 

L&G Growth Trust – Poor Performance

We have downgraded the L&G Growth Trust to Neutral from Bronze. Following an extended period of underperformance due to poor stock selection and given that the fund manager, Robert Churchlow, is making meaningful changes to the portfolio construction, we feel that a Neutral rating is a better reflection of our conviction in the fund. 

UBS (Lux) Small Caps USA – Manager Change

We have also downgraded the UBS (Lux) Small Caps USA fund to Neutral. The fund was previously under review following the announcement that Paul Graham will be taking on a new role as head of the UBS Growth Equity Strategies. We hold Graham in high regard and believe his reduced role has a significant impact on this relatively small team. While we acknowledge that the remaining fund management team of David Wabnik and Sam Kim are capable investors, we are conscious of the diminishing dedicated resources and expertise in the small cap team, given the size and nature of the investment universe. 

Fund Rating Initiations 

BNY Mellon American

We have awarded the BNY Mellon American fund a Morningstar OBSR Analyst Rating of Bronze. The fund is managed by The Boston Company, a specialist manager under the BNY Mellon Investment Management umbrella. The manager, Elizabeth Slover, has the role of portfolio co-ordinator and leads a long-established team of 15 senior industry analysts. The fund uses a sector neutral approach relative to the benchmark, the Russell 1000 Growth Index. Stock selection is driven by the analyst team with each analyst being fully accountable for their stock decisions and the freedom to apply their own tailor-made investment process to their allocated capital. We believe the fund is an attractive offering for investors seeking a pure US large-cap growth equity exposure. 

Dodge & Cox Worldwide US Stock

Dodge & Cox Worldwide US Stock fund has been awarded our highest analyst accolade of Gold. The fund is managed by a long-established and stable management team, currently numbering nine individuals, each of whom has more than 15 years’ investment experience. We believe the fund is an attractive offering for investors seeking a value-tilted US equity fund. The managers apply a contrarian investment approach and are content to be invested in areas which other market participants may view as controversial. The portfolio comprises companies that the team believes have solid business franchises and are undervalued relative to their long-term profit opportunities. 

JOHCM Asia ex-Japan

We have rated the JOHCM Asia ex-Japan fund a Bronze rating. The fund offers investors exposure to an unconstrained, all-cap portfolio of Asian equities managed by seasoned investor Samir Mehta who is based in Singapore. The emphasis is on good quality, long-term sustainable growth businesses but the portfolio does include a short-term cyclical component. The cyclical exposure can make up to 25% of the portfolio and here, the manager seeks to buy the stocks when they are out of favour. This is designed to provide an element of balance in the portfolio. We believe his experience, combined with his methodical approach, makes this an interesting offering in this region. 

Heptagon Yacktman US Equity

We have initiated analyst coverage of the Heptagon Yacktman US Equity fund with a Silver rating. The fund is managed by an experienced team of three portfolio managers and one analyst. We believe the fund is an attractive offering for investors seeking a concentrated US equity fund. The team focuses on a fairly narrow subset of US companies which exhibit less cyclicality in earnings across the market cycle. These companies tend to be high-quality business franchises in a limited number of sectors from the S&P 500 index. The team has a strong track record in stock selection from its focused high conviction approach. 

Somerset Global Emerging Markets

Somerset Global Emerging Markets has been rated Bronze. The fund is managed by Edward

Robertson who has been in charge since the fund was launched in November 2008. Robertson co-founded Somerset Capital in 2007 but his relevant experience dates back to 1999 when he joined Lloyd George Management, an emerging markets specialist house. We have a high regard for Robertson who enjoys the support of a close-knit team that he has worked with for a number of years. Furthermore, he has consistently applied a process which targets attractively valued quality companies as defined by their corporate governance and strong balance sheets and he exhibits a high level of conviction through a concentrated portfolio of stocks.

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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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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