Morningstar Manager Check-up

VIDEO: Morningstar's Jon Miller looks at the first batch of fund ratings for 2020, including a downgrade for Aberdeen Standard 

Holly Black 16 January, 2020 | 1:10PM

 

 

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

Jonathan Miller: Hi, Holly.

Black: So, our first set of funds for the year. Where should we start?

Miller: Well, let's go with the US, so the MFS Meridian US Growth Fund. So, it's run by a trio of managers. Quite often what you see with US companies is there's a longest-standing fund that existed for US investors and then, it comes to Europe and it's available here. So, this is the case for this particular fund. It's a concentrated growth. So, it's a portfolio of around 30 to 40 stocks. There's a big analyst bank at MFS. We quite like the input they put here. And the managers' long-standing – we've got an above average view of the managers and the strategy as a whole. The clean share class is rated Bronze. What they look for is long-term growth, but also sensitive to valuations, which means they're not overpaying. So, this isn't a portfolio stuffed heavily with Facebook, Amazon, Netflix, these sorts of stocks and the top holding is Google Alphabet. Microsoft up there as well. But the kind of passing we've tended to see is that given the sensitivity to valuation, it won't necessarily motor in a rising market, heavily rising momentum market, but does protects a bit better on the downside. So, all in all, the positive Bronze rating is what we have in place here.

Black: The US is quite a difficult area for active managers to do well and outperform though, so you must feel quite confident about their approach.

Miller: Yeah. It's the people, the process that come together where we've got an above average view. Even the parent, so the asset management group itself, a lot of long-tenured people there, a lot of stability, and that all goes into the mix to help have a positive rating there.

Black: Super. Okay. Fund number two?

Miller: Let's move over to Asia. So, ASI, which is Aberdeen Standard Investments, their Pacific Equity Fund. One of the longest-standing managers in the region really. Hugh Young is quite a well-known figure. But it's Flavia Cheong, who's come to fore as the team lead there the last few years. There's been a bit of turnover in the people side. But we still think there's a well-established team there. And this is on the clean share class gone from Bronze to Neutral. Now, the main factor behind that is a bit of a change in how the process is executed. So, when Aberdeen and Standard Life Investments came together, they changed how the analysts work to look more at sector research. That means you can look at what trends are going on and different things where things are counteracting in different areas. What we've found as a result of that, which isn't necessarily a bad thing, but what we've seen is, stock selection becomes more important. Actually, the allocation to different sector and countries has veered a bit more towards the benchmark, so what we call the active share, which is the percentage of the fund that looks different to the benchmark, you need to take active risk to try and outperform, has lowered a bit. So, there's a few things that we need to see come through there. And given that change and what we've observed, we felt Neutral was a better place for the clean share class rating there.

Black: But I guess a merger of two firms is quite a natural time to take stock and probably put the rating under review anyway, because things are going to change.

Miller: Well, yeah. I mean, the main changes that happened a few years ago, and why we didn't change too much then actually, is because the Asia heritage of Aberdeen was so entrenched there, and Standard Life Investments didn't have so much headcount or presence there. So, you're really looking at what we call the heritage Aberdeen team. But as we've seen more recently that active share change is really what drove our decision as a part of our qualitative assessment on that fund.

Black: Okay. Final fund?

Miller: Finally, Fidelity MoneyBuilder Dividend. This is a UK equity income fund, run by Michael Clark. He's been at the helm for about 12 years. The clean share class has a positive rating, a Bronze rating. And the main factor that we like here is the process. So, quite different from peers this is a conservative approach, really looking at companies that can stand or withhold their own in more difficult times, good cash flow generation, and quite crucially that their dividend is well covered. So, those sort of couple of tenants really take you to more the defensive part of the market.

So, if we look at performance, again, when there's sharp rising markets, this isn't going to be a top quartile fund. It did have a bit of a tricky 2017. There was a few stock selection issues there. So, the more medium-term performance has been affected a bit. It came back quite well last year. It outperformed the market, top half of the peer group. The managers still outperformed under his tenure. And ultimately, it's the risk-adjusted returns that come through for something, as I said, that's conservative, defensive, a bit different from peers.

Black: Well, I guess, if this is all about sustainable dividends, there have been quite a few cuts in recent months.

Miller: Yeah. And also, remember that the UK, there's 8, 10 stocks that count for nearly three quarters of the dividend payout. So, not just focusing on those but looking at other companies that can be defensive, they still have their dividend well covered is really important in this fund here as well.

Black: Well, thank you for your time.

Miller: You're welcome.

Black: And thanks for joining us.

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

 

Hello.

 

Jonathan Miller: Hi, Holly.

 

Black: So, our first set of funds for the year. Where should we start?

 

Miller: Well, let's go with the U.S., so the MFS Meridian U.S. Growth Fund. So, it's run by a trio of managers. Quite often what you see with U.S. companies is there's a longest-standing fund that existed for U.S. investors and then, it comes to Europe and it's available here. So, this is the case for this particular fund. It's a concentrated growth. So, it's a portfolio of around 30 to 40 stocks. There's a big analyst bank at MFS. We quite like the input they put here. And the managers' long-standing – we've got an above average view of the managers and the strategy as a whole. The clean share class is rated Bronze. What they look for is long-term growth, but also sensitive to valuations, which means they're not overpaying. So, this isn't a portfolio stuffed heavily with Facebook, Amazon, Netflix, these sorts of stocks and the top holding is Google Alphabet. Microsoft up there as well. But the kind of passing we've tended to see is that given the sensitivity to valuation, it won't necessarily motor in a rising market, heavily rising momentum market, but does protects a bit better on the downside. So, all in all, the positive Bronze rating is what we have in place here.

 

Black: The U.S. is quite a difficult area for active managers to do well and outperform though, so you must feel quite confident about their approach.

 

Miller: Yeah. It's the people, the process that come together where we've got an above average view. Even the parent, so the asset management group itself, a lot of long-tenured people there, a lot of stability, and that all goes into the mix to help have a positive rating there.

 

Black: Super. Okay. Fund number two?

 

Miller: Let's move over to Asia. So, ASI, which is Aberdeen Standard Investments, their Pacific Equity Fund. One of the longest-standing managers in the region really. Hugh Young is quite a well-known figure. But it's Flavia Cheong, who's come to fore as the team lead there the last few years. There's been a bit of turnover in the people side. But we still think there's a well-established team there. And this is on the clean share class gone from Bronze to Neutral. Now, the main factor behind that is a bit of a change in how the process is executed. So, when Aberdeen and Standard Life Investments came together, they changed how the analysts work to look more at sector research. That means you can look at what trends are going on and different things where things are counteracting in different areas. What we've found as a result of that, which isn't necessarily a bad thing, but what we've seen is, stock selection becomes more important. Actually, the allocation to different sector and countries has veered a bit more towards the benchmark, so what we call the active share, which is the percentage of the fund that looks different to the benchmark, you need to take active risk to try and outperform, has lowered a bit. So, there's a few things that we need to see come through there. And given that change and what we've observed, we felt Neutral was a better place for the clean share class rating there.

 

Black: But I guess a merger of two firms is quite a natural time to take stock and probably put the rating under review anyway, because things are going to change.

 

Miller: Well, yeah. I mean, the main changes that happened a few years ago, and why we didn't change too much then actually, is because the Asia heritage of Aberdeen was so entrenched there, and Standard Life Investments didn't have so much headcount or presence there. So, you're really looking at what we call the heritage Aberdeen team. But as we've seen more recently that active share change is really what drove our decision as a part of our qualitative assessment on that fund.

 

Black: Okay. Final fund?

 

Miller: Finally, Fidelity MoneyBuilder Dividend. This is a U.K. equity income fund, run by Michael Clark. He's been at the helm for about 12 years. The clean share class has a positive rating, a Bronze rating. And the main factor that we like here is the process. So, quite different from peers this is a conservative approach, really looking at companies that can stand or withhold their own in more difficult times, good cash flow generation, and quite crucially that their dividend is well covered. So, those sort of couple of tenants really take you to more the defensive part of the market.

 

So, if we look at performance, again, when there's sharp rising markets, this isn't going to be a top quartile fund. It did have a bit of a tricky 2017. There was a few stock selection issues there. So, the more medium-term performance has been affected a bit. It came back quite well last year. It outperformed the market, top half of the peer group. The managers still outperformed under his tenure. And ultimately, it's the risk-adjusted returns that come through for something, as I said, that's conservative, defensive, a bit different from peers.

 

Black: Well, I guess, if this is all about sustainable dividends, there have been quite a few cuts in recent months.

 

Miller: Yeah. And also, remember that the U.K., there's 8, 10 stocks that count for nearly three quarters of the dividend payout. So, not just focusing on those but looking at other companies that can be defensive, they still have their dividend well covered is really important in this fund here as well.

 

Black: Well, thank you 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.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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