Morningstar Manager Check-up

VIDEO: Morningstar's Jonathan Miller looks at three funds that have been reviewed under the enhanced Morningstar Analyst Rating

Holly Black 5 December, 2019 | 10:06AM
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Holly Black: Welcome to the Morningstar manager checkup. I'm Holly Black. With me is Jon Miller. He is Head of Morningstar Manager Research. Hello.

Jonathan Miller: Hi, Holly.

Black: So, we've got a few funds to look at. And some of these have been rereviewed under the enhanced Morningstar Analyst Rating. So, where should we start?

Miller: That's correct. Maybe just to quickly recap, our enhanced rating has really dialed down on fees. And ultimately, when we look at a strategy, we think fees can make a difference. So, different share classes depending on their expenses can be different outcomes from Gold, Silver, Bronze, Neutral, Negative.

So, let's start with the first fund. So, BlackRock UK, that's managed by Nick Little. He's been involved here since 2011. And we think quite highly of the team at BlackRock in the UK equities. They're quite focused on growth companies and this fund is, in particular. So, looking at industries where there's – or companies where there's a structural change going on and where there's a competitive advantage. So, even go into the US, so there's an allowance of 20% for UK equity funds to invest elsewhere. And he picks up a few tech names in the US as well that really fulfils that growth bucket. So, overall, we think there's some positives here. We think the valuation framework could be a little bit more disciplined. But remember, it's in the sphere of high growth companies. Overall, our rating here is Bronze on the clean share class. So, that's the ones that you can tend to buy on platforms, for example, for advisors. And then, the more expensive share classes end up as Neutral.

Black: So, that's when investors if they were considering this fund, that's sort of a sign or a way of navigating their way to the best share class presumably.

Miller: Exactly. And you know, in the UK, particularly, these more expensive share classes tend to be legacy ones or historical where there's a commission that's bundled in. We've moved away from that about five years ago, but we still think it's important signaling, because there's assets that are stuck in those more expensive share classes.

Black: Super. Okay. What's fund number two?

Miller: So, we'll stick with the UK and the smaller companies, so Aberdeen Standard Investments UK Smaller Companies. So, the team here – so, Aberdeen merged with Standard Life. The team here is really the heritage Standard Life Investments. Harry Nimmo, who's been a very well-known name in the smaller companies. He's the lead manager here. And he's had a process that's relied on internally they call it the matrix. But there's a lot of quantitative work on companies showing some strong momentum notably and growth. And that helps them sift through what is quite a large universe. And they do detailed work, more bottom-up analysis around the company, go and meet management. And we think this is among the best-in-class to be honest, so a high view on the process, a high view on the people and all the share classes available get a Gold.

Black: All of them?

Miller: Even a bit more the expensive ones, UK Smaller Companies, you know, there is room for outperformance. Here notably, that's kind of quite wide dispersion historically, and we think that with our qualitative assessment things are well set here. And U.K. is unloved. This fund is up 35% in the first 11 months of the year at the end of November. So, top of its sector. That doesn't mean that's the reason it's Gold. You know, we take a long-term view. But just goes to show that there's some ability to generate strong outperformance there.

Black: So, to be clear though, the different share classes still have different costs. It's just that you think they're all going to outperform. So, people could still do better in different share classes?

Miller: Yeah, exactly. Ultimately, if you're stuck in the more expensive ones, we still think that that hurdle…

Black: You might only got 34% this year...

Miller: Exactly. That hurdle can be overcome given our qualitative views and strengths we believe there is in the approach.

Black: Okay. So, our last one is an investment trust. So, these just have one share.

Miller: Exactly. So, one way of just buying it through execution…

Black: It seems to work, everyone should do that.

Miller: Well, it moves around a premium and discount as well around the NAV. So, that's something else that is just in the investment trust world. We're looking at TR Property. So, property, much more known for its open-ended structure where daily dealing isn't great for an illiquid asset class. For this particular trust, about 90% is invested in listed equities, and about 10% in bricks and mortar. So, only a small amount in bricks and mortar. But still, we think the investment trust structure is worthy here. The manager Marcus Phayre-Mudge, he's been involved in this trust for probably 25 years or so initially as part of the team, then a deputy manager, the manager retired, and he's led it for quite a while. So, really in-depth analysis they do across the market. This trust covers European property. There's an overweight to the U.K., perhaps surprisingly, given the Brexit and everything, but he's finding ideas and maybe some niche areas like healthcare, student accommodation, these sort of things. Strong performance, but really on a qualitative work around the people and the process, especially, that help drives the trust to a Silver analyst rating.

Black: Super. Well, thank you so much for your time.

Miller: You're welcome.

Black: And thanks for joining us.

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 Black  is Senior Editor,