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Morningstar Manager Check-up

Morningstar head of fund research Jonathan Miller on why analysts rate emerging market funds by Fidelity and Aberdeen Standard and an ethical fund from Kames

Holly Black 12 September, 2019 | 10:30AM



Holly Black: Welcome to the Morningstar Manager Check-Up. I'm Holly Black. With me is Jon Miller. He's Head of Manager Research at Morningstar.


Jonathan Miller: Hello.

Black: Three funds to talk about today, where would you like to start?

Miller: Okay. So, these are funds that we reviewed in the last couple of months. And we'll start with Fidelity Emerging Markets. It's run by Nick Price. We reaffirmed the Silver rating. We like the process and people especially there. And the way the fund works in terms of the process, Nick Price relies on three regional experts, let's say, in different parts of the world. They help with ideas. He then vets them and goes into more deeper work to create then a 60-70 stock portfolio. Off the back of that, I mean, to start with you've then got about 50 analysts from Fidelity doing a lot of bottom-up work on companies. So, we think that the people are strong, the process, the quality of research that goes into the fund is strong, and that helps cement a Silver view. Maybe I would add, if we talk about performance, the fund did struggle last year, underperforming and quite low down in its category. If we look to this year, so far, till the 31st of August, its returns are nearly 20% in Sterling, and pretty much double that of the index, one of the top performers so far this year. So, one bad year doesn't necessarily mean you need to be quick and maybe do a downgrade. So, I think here we've been vindicated with our view of the team and the stock picking that goes on there.

Black: Is having regional experts in locations important do you think, because sometimes you get an emerging market fund and the manager is just sitting in the UK doing it?

Miller: Yeah, I mean, you got different people do things different way. In this instance, the manager, funny enough, is based in London, but Fidelity has got big resources globally. We think that adds to the bottom-up work, especially when in esoteric markets where you got individual risks going on, we think the on the ground expertise does help as well.

Black: So, what's fund number two for today?

Miller: The next one, we're going further into emerging markets but a region in emerging markets and that's Aberdeen Latin America. So, I should be saying ASI, Aberdeen standard Investments Latin America. And there, the team – some of the team is in São Paulo, the majority of the team is actually in London. And there the lead manager is Peter Taylor. So, he's based in São Paulo. There's two or three individuals as well who are involved in an important way in portfolio construction. But it is a team effort with ASI as we have to call them now. There they are following what they've done historically there with the Aberdeen – what we call Aberdeen heritage, quality and price (bring) through. So, quality, especially in corporate governance, quality of management and balance sheet strength. And price is about paying the right multiple for the stocks they're looking at.

Black: So, obviously, Aberdeen and Standard Life merged. And now we have ASI. If there is a merger, does that immediately put a fund under review with your team?

Miller: Well, it can happen. I mean, sometimes it depends on the moving parts, how they come together, what the effects are. Here, we think that there's more all – or the evidence has shown that the Aberdeen team in emerging markets pretty much fully remains. And there's only one person who was at Standard Life Investments, who's now part of that emerging markets team that's looking at this LatAm fund. So, we can say it's ex-Aberdeen, to be honest. But also a few changes going on there, how they undertake their research, specifically, they're looking more separating things in sectors. And we think that gives more granularity around things that are happening. Because, as I said previously, in emerging markets, there's fast moving dynamics, and we think the sector research will help some of their views. They've implemented that on their Global Emerging Market Fund. It's helped performance in the last year, so some fruits showing there. And then in the Latin America Fund, it's been pretty consistent across time. And there we hold a Bronze rating.

Black: Super. So, our final fund is an ethical one.

Miller: Correct. So, Kames Ethical Equity. So, focused on the UK, Audrey Ryan has been running the fund for 20 years. So, a very long tenured manager on that strategy. And there, part of the ethical criteria includes excluding. So, there they say, right, we don't want to invest in tobacco, don't want to invest in certain other sectors. They have a 12-criteria checklist among their ethical work. So, quite deep ethical work. And then, Audrey Ryan uses research from the analyst team based on stocks that can go into the fund to construct the portfolio. Now, given the makeup of the U.K. index, it's quite heavy in oil and gas and tobacco, areas that are excluded, what happens is, this fund then has a different shape to the FTSE All-Share Index. So, it's quite overweight mid-caps. That affected performance in 2016 during Brexit where some stock selection detracted as well. Last year was a bit difficult. But this year, the fund has beat the index by about 3%. So, coming back a bit, three and five-year numbers don't look that rosy to be honest. But over the long term, and also, execution of the process, we feel quite comfortable still holding a positive rating of Bronze on this fund.

Black: Super. Well, thanks for your time.

Miller: You're welcome.

Black: And thanks for joining us.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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