Morningstar Fund Ratings: Weekly Round-up

ANALYST RATINGS: This week, fund analysts reveal new ratings for Fidelity, an upgrade for iShares and a downgrade for Vanguard

Morningstar Analysts 20 November, 2017 | 4:35PM
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New Ratings

Fidelity Asia Pacific Opportunities - Bronze

Mark Laidlaw

This is a distinct offering whose prospects lie squarely with portfolio manager Anthony Srom, lead manager since June 2014 at the SICAV and since launch of the UK-domiciled fund. Srom has been with the firm for 11 years, following the typical Fidelity career path as an analyst before making the move to portfolio manager. He uses the analyst team as a starting point but does the majority of the heavy lifting himself. A firm’s suitability is determined on three criteria – company fundamentals, market sentiment and valuation. To make the grade a firm typically needs ticks in at least two of the three factors, together with an expected total shareholder return of at least 10% per annum.

The portfolio has a distinct contrarian bias and is index-unaware  - the portfolio is zero weight dominant technology names like Samsung Electronics, Tencent and Alibaba - with a maximum of 35 names. This can result in periods of underperformance as seen in late 2016, but the overall track record thus far is impressive, relative to both peers and the MSCI AC Asia Pacific ex-Japan index. The only potential blight is the fee where Fidelity could do a better job for investors. That said, we believe the fund's prospects are promising.

iShares MSCI Korea ETF - Neutral

Monika Dutt

The iShares MSCI Korea UCITS ETF tracks a broadly representative benchmark, but its single-stock and sector level concentration, compounded by its expensive ongoing charge of 0.74%, limits its Morningstar Analyst Rating to Neutral.

PIMCO Short-Term High Yield Corporate Bond Source ETF - Neutral

Jose Garcia-Zarate

This is an investment proposition where the bulk of risk comes from the credit quality component of the basket, as interest rate risk is limited by its focus on the shorter maturity segment of the market. Ultimately, however, high yield is an area where experienced active managers have shown that they can add value over a standard benchmark; for example, by means of over- or underweighting sector exposures. Besides, the ETF’s fee of 0.55% for the unhedged USD share class and 0.60% for the currency-hedged versions is at the top-end for passive funds providing similar maturity-segmented exposure to this market.

Xtrackers S&P 500 Equal Weight ETF - Bronze

Monika Dutt

The Xtrackers S&P 500 Equal Weight ETF offers exposure to the S&P 500 but equally weights its constituents. By rebalancing each stock to the same weight every quarter, the fund injects a modest contrarian rebalancing discipline. This helps it to avoid stock and sector concentrations, to which market-cap weighted indexes are more prone. While this strategy is more diversified than its parent index, it suffers from higher transaction costs. It is also more expensive compared with other passive funds offering exposure to U.S. large-cap equities, limiting its Morningstar Analyst Rating to Bronze.


iShares JPMorgan Emerging Markets Local Government Bond ETF – Silver

Jose Garcia-Zarate

The ETF now tracks a benchmark that provides improved diversification to the market of local currency-denominated emerging market bonds. This places the ETF on a more even keel relative to passive peers and, in conjunction with a competitive ongoing charge 0.50%, makes us more confident on the fund’s ability to continue delivering risk-adjusted returns in excess of the average for its Morningstar Category over the long term.  


Vanguard Global Bond Index – Bronze

Peter Brunt

This index fund remains an interesting proposition to gain comprehensive exposure to developed fixed income markets. Its ongoing charge of 0.15% is highly competitive and a key factor in its favour. However, in our view the fund will do better relative to its category peers, which include active funds, when monetary policy cycles are in sync across all geographical areas covered by the benchmark. An Analyst Rating of Bronze more appropriately conveys our level of conviction on the fund’s ability to outperform its peers over extended periods.

Ratings moved to Under Review

Henderson European Focus

Henderson European Focus Trust (HEFT)

Henderson European Selected Opportunities

Henderson Gartmore Continental European

Peter Brunt

Janus Henderson has announced the planned departure of three members of its London-based European equities team. Asim Rahman, Bill Casey and Nick Kissack have all gone on gardening leave until their departure in January 2018. Rahman had worked with lead fund manager John Bennett since 2003 and was a listed co-manager on the open-end strategies since 2010.

Casey and Kissack were analysts with good levels of experience who had been on the team since 2011 and 2014 respectively, and were contributing ideas to all the large-cap fund managers on the desk, including Bennett. There remain four analyst/co-managers on the European equities team, however we note that two of these are more focused on individual strategies. We understand that the group is looking to replace the lost resource immediately. We consider these changes to be material, and are therefore placing the funds' ratings Under Review until we have spoken to Bennett in the coming week.

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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