Morningstar Fund Ratings: Weekly Round-up

ANALYST RATINGS: Fund analysts reveal why they have downgraded funds from Parvest, BlackRock and Schroders

Morningstar Analysts 8 August, 2017 | 12:08PM
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New Ratings

Amundi ETF Government Bond Lowest Rated EuroMTS Inv Grade (X1G) – Neutral

DB X-Trackers II iBoxx Sovereigns Eurozone Yield Plus ETF (XY4P) – Neutral

Jose Garcia-Zarate

Although tracking different indices, both these ETF provide exposure to the group of investment-grade Eurozone government bond issuers offering the highest yields. More often than not, these are issuers carrying the lowest ratings.  Recent past performance has been very good as a direct result of the ECB intervention in favour of the euro and the positive effects this has had on peripheral debt.

Ultimately, however, this is more of a tactical than core investment proposition; one that favours investors at times when credit risk takes a back seat in bond pricing dynamics, but one that also comes with much higher volatility and downside capture relative to an all-issuer approach. For this investment proposition to become a core holding, we would need credit risk to cease playing a role in eurozone bond pricing dynamics, which is not something we can take for granted.

These ETFs can easily either be at the top or the bottom of the Morningstar category over short-to-mid-term horizons, while over the long-term, the likelihood is one of a bumpy ride to end up with returns equal to those offered by an all-issuer approach.  On that basis, we award them a Morningstar Analyst Rating of Neutral.

Fundsmith Equity Feeder – Gold

Peter Brunt

This offshore feeder fund invests directly into the UK-domiciled, Morningstar Analyst Gold-rated Fundsmith Equity fund. While the pricing is more expensive than on the onshore fund, we do not believe the difference is enough to warrant a differentiated rating. The fund is therefore assigned a Morningstar Analyst Rating of Gold in line with that of the UK-domiciled vehicle.

Magallanes Value Investors UCITS Iberian EquitySilver

Francesco Paganelli

We think the strategy is a compelling option for investors in search of all-cap, unconstrained Iberian equity exposure. Manager and CIO Iván Martín is a veteran value investor with around 15 years of experience in this market. He co-founded Magallanes Value Investors in December 2014 and previously ran Iberian and European equities mandates at Aviva and Santander, applying the same valuation-sensitive approach. We think the strategy's process provides an edge relative to its competition. The team builds the portfolios from the bottom up with a long-term mind-set, buying stocks with solid fundamentals and priced at a discount to their estimated intrinsic value. The manager’s focus on capital preservation can lead to a buildup in cash stakes when there’s a shortfall of opportunities, providing dry powder to take advantage of market volatility. All in all, we think the funds are a solid proposition in this category, and we have a positive view on the parent company.


Fidelity China Special Situations (FCSS) – Bronze

David Holder

Whilst Nicholls’ tenure here is relatively short – since April 2014 – his investment experience with Chinese equities goes back to September 2003 when he began managing the Fidelity Funds Pacific fund which can invest up to a third of the portfolio in this area. The investment process is entirely bottom up with Nicholls allowed significant latitude to deviate from the index at the stock and sector levels. He carries out around 500 company meetings per year and draws heavily upon the wider and extensive resource available to him at Fidelity in the region and beyond.

Nicholls has been at Fidelity since 1996, and is thus well positioned to utilise its global research capability. Aside from our views on the fees levied here, which we think have significant room for improvement, we think that the fund has considerable merit for investors seeking access to this dynamic and increasingly relevant economy. In recognition of these factors and Nicholls’ promising start here we are upgrading the Morningstar Analyst Rating to Bronze from Neutral.

Fidelity European Dynamic GrowthSilver

Francesco Paganelli

Our conviction in the fund manager’s capabilities has increased over time. Fabio Riccelli adheres to a disciplined, long-term-oriented, growth-tilted process. The consistency of execution is particularly impressive in our view, and the process plays to the group’s strengths and research firepower in European equity. The process leads to a highly distinctive portfolio of 50-60 stocks. Riccelli has delivered a stellar track record for investors over his eight years’ tenure here. We view the fund as a strong option in this category for investors who share the manager’s long-term mind-set, and we think the Silver rating better reflects our conviction in the fund’s potential to outperform its peers and benchmark over a full market cycle.

Old Mutual North American EquitySilver

Fatima Khizou

The team managing this quantitative fund enhanced the model in 2009, introducing a dynamic aspect to factor weightings. Since then, the flexibility and dynamic nature of the approach has helped the team steer away from areas prone to over-crowding, and mitigate downside risk in falling markets. As such, the fund has managed to successfully navigate recent challenging periods for active managers. We believe that the effective implementation of this refined, research-driven quant process by an experienced management team will result in continued outperformance over the long-term. The fund’s Morningstar Analyst Rating is upgraded to Silver from Bronze to reflect our increased confidence in this strategy.


Parvest Equity USA Mid CapBronze

Fatima Khizou

We continue to hold Parvest Equity USA Mid Cap’s lead manager Thyra Zerhusen and her team in high regard. Their expertise in US mid-cap equities investing, coupled with a rigorous long-term bottom-up approach, have served investors well. However, we note that the fund’s ongoing charge on its clean share class relative to those on other US equity funds, both mainstream and mid-cap, is extremely high, giving it a greater hurdle to overcome. As a result, the fund’s Morningstar Analyst Rating is downgraded to Bronze from Silver, reflecting our lower level of conviction in the fund's ability to outperform over the long term.

BGF Global Dynamic EquityBronze

Muna Abu-Habsa

The fund's rating was Under Review following some team changes. Prior to that, it held a Silver rating. In June 2017, BlackRock announced that Dennis Stattman, who cofounded this strategy since 1989, and comanaged this fund since its inception in 2006, would retire from portfolio management activities in August 2017. The loss of Stattman's investment expertise is a considerable one for investors, but his transition has been better prepared for than the apparent short notice might suggest. Still, we think that some recent process adjustments, coupled with the recent evolution in the leadership team, are sufficiently important to support a lowered level of conviction.

Schroder UK Dynamic Smaller CompaniesNeutral

Samuel Meakin

Schroders appointed Luke Biermann as lead manager of Schroder UK Dynamic Smaller Companies in June 2017, following the announcement that Paul Marriage and John Warren would be leaving the firm to set up their own boutique investment business, Tellworth Investments, in the fourth quarter of 2017. Biermann has managed the Schroder European Smaller Companies fund, a Europe ex-UK mandate, for more than five years, but he has no direct portfolio management experience within the UK smaller companies universe.

Marriage and Warren managed the fund according to their own distinct “P3M” process, and its solid implementation by the experienced pairing over a number of years was an important factor in our positive view of the fund. Given the change in management and process, we have decided to assign 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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