New Ratings
iShares $ TIPS ETF – Silver
Jose Garcia-Zarate
IShares $ TIPS is an interesting investment proposition through which to gain access to the market of inflation-linked bonds issued by the US government. An all-maturity passive approach to this market has performed well over the long term. The ongoing charge of 0.25% is at the top end of the fee range for this passive exposure, although it is partly offset by substantial revenues generated by heavy securities lending. While this practice may unnerve some investors, it does not disguise from the basic fact that this ETF is likely to produce returns in excess of its Morningstar category.
iShares $ Treasury Bond 1-3yr ETF – Bronze
iShares $ Treasury Bond 3-7yr ETF – Bronze
iShares $ Treasury Bond 7-10yr ETF – Bronze
Jose Garcia-Zarate
iShares $ Treasury 1-3; iShares $ Treasury 3-7 and iShares $ Treasury 7-10 ETFs afford investors fine-tuned access to delimited maturity segments of the US Treasury market. These ETFs are particularly useful to engage in duration modulation within investment portfolios. They are well managed and although some engage in heavy securities lending, we believe that there are solid counterparty risk mitigation measures in place. We award these ETFs an Analyst Rating of Bronze.
PowerShares S&P 500 High Dividend Low Volatility ETF – Bronze
Monika Dutt
This ETF targets high-dividend-yielding stocks in the S&P 500 but keeps risk in check by filtering out some of the riskier names from this group and capping exposure to individual stocks. This dual focus on yield and risk should help the fund continue to generate attractive performance relative to its peers over the long term. But large sector bets are still a source of risk which, together with its short record, limit its Morningstar Analyst Rating to Bronze.
Upgrades
Eastspring Investments Japan Dynamic – Silver
Don Yew
We have upgraded Eastspring Japan Dynamic’s Morningstar Analyst Rating to Silver from Bronze, underpinned by our increased conviction in highly esteemed and long-tenured portfolio manager Dean Cashman. He has managed this strategy since its inception on 5 July 2006 and delivered excellent long-term returns. The fund employs a well-established investment process that seeks to invest in the Japanese equity market in an unconstrained manner, often with a contrarian bent. We note that the fund has been soft-closed to investors since late 2015.
Downgrades
Fidelity Italy – Bronze
Francesco Paganelli
Our diminished conviction in this fund stems from our concerns about the manager’s large workload. The fund’s skipper, Alberto Chiandetti, continues to be sole lead manager on Fidelity Switzerland (since 2011) and on the Europe ex-UK strategy Fidelity European Opportunities (since 2014). Although he does receive support from a dedicated analyst on the country funds, in addition to Fidelity’s wider European research team, we think his current responsibilities are too wide given the small overlap across his funds’ investment universes and the fact that his stock-selection process rests on deep fundamental research. The inconsistent performance across the funds managed by Chiandetti in the past three years is also a warning signal. Overall, we remain positive given the fund’s solid process, relatively decent fees, strong parent, and the manager’s proven track record in this asset class, but we think that his heavy workload may have an impact on his ability to be as successful on this fund as he was in the past.
Franklin Mutual European – Bronze
Mathieu Caquineau
Franklin Templeton Investments announced in October 2017 that Philippe Brugère-Trélat will retire and step down from the fund on May 1, 2018. He has three decades of investment experience, mostly in European equity, and has successfully managed this strategy since 2005. While we think the fund is losing some appeal as a result, we still see it as an attractive option. Katrina Dudley, who has been the fund’s official co-pilot since 2007, will take over. She is well-versed in Mutual Series’ management style, having joined the firm in 2002. Starting from January 2018, Mandana Hormozi will comanage the fund with Dudley.
Their collaboration is untested, but we find it reassuring that Hormozi has also been with the firm for more than 10 years. The main challenge awaiting the duo will be to turn performance around, as the fund is currently facing strong headwinds. We are confident in their ability to do so, given the good long-term track record of the strategy and the backing they receive from the deep and tenured team at Franklin Mutual Series.
