Baillie Gifford Funds Downgraded in Raft of Morningstar Changes

There are plenty of funds getting achieving analyst coverage, but the real story is the growth funds getting downgraded after some time in the sun

Morningstar Manager Analysts 22 August, 2023 | 9:18AM
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New Ratings

Federated Hermes Asia ex-Japan Equity F USD Acc – Silver

Michael Born

We have initiated coverage of the Hermes Asia ex-Japan fund, with the Process pillar rated as High and the People pillar rated as Above average. We have a positive opinion on the lead manager Jonathan Pines and believe he is amply resourced with a team of four. Whilst this is smaller than some peers in the universe, the concentrated nature of the portfolio and our conviction in the judgement of Pines leads to a positive view. The process, meanwhile, is highly structured and classically contrarian, trying to find opportunities which are cheap relative to their quality, with the regular screening of the universe to generate ideas. With the process being consistently executed with impressive results for over 10 years, we believe it has shown features of being best in class. The overall Morningstar Medallist Rating will be initiated at Silver for the clean F share class as a result.

Lazard Global Quality Growth EA Acc USD – Silver

Ramanand Kothari

Lazard Global Quality Growth benefits from a seasoned duo, deep analyst resources and a well-codified, quality-focused investment approach. Co-managers Louis Florentin-Lee and Barnaby Wilson have been at the helm of the Global Quality Growth strategy since its inception in February 2011. While its UCIT vehicle was launched recently in February 2022, we draw confidence from the strategy's overarching philosophy and process, which this UCIT vehicle inherits. The duo's impressive two-decade-long firm tenure and deep investing experience provide continuity and stability. This strategy uses an established, well-structured, quality-oriented investment process with consistent execution since its inception. It targets companies with higher financial productivity (higher return on equity, return on assets, and cash flow return on assets) and durable competitive advantages. The managers are long-term investors, which reflects in its lower turnover of about 13% annually over the trailing five-year period. We have initiated the strategy’s People and Process ratings at Above Average, resulting in the Morningstar Medalist Ratings of Silver for the cheaper share classes, including the clean EA Acc USD share class, while the expensive share classes earn a Bronze rating.

Manulife GF India Equity I2 – Neutral

Harsh Jain

A thoughtfully applied approach but needs to be observed for longer to gain higher conviction. Fund portfolio manager Marco Giubin is advised of the portfolio positions by Rana Gupta and Koushik Pal, the lead and backup managers, respectively, at the strategy level. Gupta has been at Manulife since the strategy’s inception in 2012. The presence of experienced managers with variety and depth of experience is a positive, but we believe the strategy needs to have a more stable support team.

The portfolio manager believes that the emerging nature of the Indian economy creates inefficiencies and aims to invest in these companies early in their earnings trajectory while also following sell discipline when target prices are reached. The process implements frequent reviews of catalysts, target prices, and relative attractiveness of the security versus the universe based on a GCMV framework (growth, cash flows, management, and valuation in presence of catalysts) - the investment framework consistently applied has helped adherence to style, but high portfolio turnover is a watch point. Overall, the People and Process Pillars are assigned Average ratings, and all share classes receive Morningstar Medalist Ratings of Neutral.

Polar Capital Emerging Market Stars S USD Acc – Silver

Andrew Daniels

Strong leadership and an experienced supporting cast underpin this strategy. Jorry Nøddekær has run this strategy (via the Ireland-domiciled vehicle) since June 2018, when he joined Polar Capital to establish an emerging-markets growth team. Nøddekær is joined by comanager Naomi Waistell, who came aboard in August 2020 from Newton Investment Management. Both managers come across as passionate investors and consistently impress with their market- and stock-level insights. Backing the duo are five teammates: Three of them have worked on the team for five-plus years, while two were brought on in 2023's first half to build out more expertise in India and Latin America. Together, the team employs a well-codified, sustainability-minded growth approach. It centers on finding industries where there is a supply/demand imbalance that can persist over long periods of time. The Morningstar Medalist Rating for the fund’s S USD Acc share class is rated Silver.

RobecoSAM SDG High Yield Bonds FH EUR – Silver

Elbie Louw

RobecoSAM SDG High Yield Bonds is led by experienced managers plying a time-tested investment approach combined with a sustainability overlay and earns People and Process ratings of High and Above Average, respectively. Lead manager Sander Bus and comanager Christiaan Lever have successfully run this strategy since its October 2019 inception. Lever joined the high-yield portfolio management team in 2016 and has gradually taken on more portfolio management responsibilities in high-yield and emerging-markets strategies. The supporting cast is impressive and includes a growing high-yield portfolio management team with two additional portfolio managers and a technical portfolio manager planned to join the existing team of three within the next three months, as well as 22 experienced corporate credit analysts. Fundamentally, this strategy replicates the proven investment process of its sibling strategy, Robeco High Yield Bonds, with a solid execution of a careful, value-aware process, combined with a sustainability overlay, lead to a Morningstar Medalist Ratings of Silver.

UBS (Lux) Bond Fund - Euro High Yield EUR K-1-Acc – Silver

Jeana Marie Doubell

Morningstar initiated coverage on UBS (Lux) Euro High Yield with an Average People Pillar score and an Above Average Process Pillar score. Lead portfolio manager Zachary Swabe and comanager John Mather have a solid partnership and are part of a five-member high-yield portfolio manager group, supported by a six-member European credit-analyst team which feeds into a 30-member global credit[1]analyst team. However, recent analyst departures bear watching, as this bottom-up driven strategy relies heavily on its analyst team to produce a range of ideas across multiple sectors. The managers aim to outperform the ICE BofA Merrill Lynch EUR High Yield 3% Constrained Index by 1 to 2 percentage points per year over a market cycle, while keeping volatility in check. The portfolio will often exhibit a higher yield than its benchmark, due to the managers’ penchant for bargain-hunting among lower[1]quality B and CCC rated names. The team primarily focuses on traditional high-yield names, but the managers also make active use of their flexible 30% allocation (maximum) to bonds issued in non-euro currencies (hedged back into euros). By consistently implementing their investment process, the managers have built a strong track record over time. All share classes receive Morningstar Medalist Ratings of Neutral.


ATLAS Global Infrastructure C – Gold from Silver

Justin Walsh

ATLAS Infrastructure is an excellent option and our growing confidence in the team results in its Australian domiciled funds being awarded a Morningstar Medalist Rating of Gold, an upgrade from Silver and the unhedged UCITs funds also earn Gold. ATLAS' flagship fund launched in late 2017 with considerable backing from Global Infrastructure Partners, a highly successful private infrastructure firm. Partners Rod Chisholm, David Bentley, Peter Hyde, Matt Lorback, and David McGregor are all highly experienced and form the investment committee, which drives portfolio positioning. The team's history together is shorter than most, however, we rate them highly notwithstanding Hyde's announced retirement in mid-2023. Reinforcing our confidence there are significant resources and a depth of personnel for the firm to draw upon resulting in one of the largest in the universe we cover. Astutely timing positional shifts driven by detailed research have contributed materially to performance, and the group has shown discipline in selling positions when it believes relative value is not compelling, providing confidence in this strategy's investment merit. A shift to overweight the electric sector in the UK/Europe versus the US is an example of this. In particular, analysis of evolving regulations on climate change and carbon dioxide emissions is noteworthy in how it's incorporated into longer-term forecasts to ward against stranded assets risk.

Fidelity Italy Y Acc EUR – Gold from Silver

Francesco Paganelli, CFA

Manager Alberto Chiandetti has run this strategy for 15 years. His expertise in the Italian equity market is top-notch, and importantly, given the research-intensive process adopted, we view positively that the manager is now fully focused on this strategy, earning it an upgrade of the People rating to High from Above Average. All in all, this is a fundamentally sound strategy benefiting from an expert lead manager and a strong research edge. The Morningstar Medalist Rating for the fund’s Y share class is upgraded to Gold from Silver.


Baillie Gifford Global Discovery B Acc – Neutral from Silver

Baillie Gifford Worldwide Discovery B GBP Acc – Neutral from Silver

Daniel Nilsson

While the team, led by Douglas Brodie and flanked by two investment managers with long tenures at Baillie Gifford are experienced, we are concerned by the team’s continued inability to execute their process in a way that would produce category- and index-beating results on a risk-adjusted basis. While not too concerning at this point, there have also been several departures from the lower ranks of the team recently. Moreover, whilst the process has been consistently applied since launch, we have lessened our conviction in both portfolio construction and the application of sell discipline, which has led to underwhelming performance outcomes over recent times. Subsequently, we have downgraded both the People and Process Pillar of the Baillie Gifford Global Discovery and the Baillie Gifford Worldwide Discovery Fund from Above Average to Average.

BNY Mellon Global Real Return EUR W Acc – Bronze from Silver

BNY Mellon Real Return U Acc – Bronze from Silver

BNY Mellon Sustainable Global Real Return EUR W Acc – Bronze from Silver

BNY Mellon Sustainable Real Return U Acc – Bronze from Silver

Francesco Paganelli, CFA

While at a high level this investment process is sufficiently well-structured, portfolio complexity has steadily increased here, lifting execution to a central role in the strategy’s success. That increases uncertainty around the repeatability of this approach in our view, and while the strategy tends to play defense well, the continued struggles to deliver alpha on a consistent basis relative to the category benchmark give us pause. As a result, we are lowering the Process rating to Average. The team lost a valuable team leader when former head Suzanne Hutchins suddenly died in 2022. Yet, the group can count on a deep bench of expert asset allocators and an expanded, newly formed research group. As we remain confident in the team's capabilities and supporting resources, the strategy maintains an Above Average rating on People. Overall, the changes result in a lowered Morningstar Medalist Rating of Bronze from Silver for the clean share classes of the UK- and Ireland-domiciled versions of the Newton Real Return and Newton Sustainable Real Return strategies.

Capital Group New Perspective (LUX) Z – Silver from Gold

Stephen Welch

Seasoned leaders steer American Funds New Perspective using a time-tested method targeting firms benefiting from global trade. Its cheapest U.S., Luxembourg, and Australia share classes have a Morningstar Medalist Rating of Gold, while pricier shares land at Silver and Bronze. The strategy's proven multimanager approach sets it up for long-term success. Capital Group, the parent of American Funds, splits the strategy's $120 billion asset base into individual sleeves among nine named managers, a handful of undisclosed up-and-comers, and two analyst-run research sleeves. Two principal investment officers help ensure the fund's sleeves meld together into a diversified global portfolio. The managers run their sleeves of the overall portfolio as they see fit but must stick to companies that receive at least 25% of their revenues from outside their home region and have at least a $3 billion market-cap float at the time of purchase. While we maintained Process Pillar ratings at Above Average and High for the People Pillar, changes in the competitive landscape within the Morningstar Category have resulted in the downgrade of the Morningstar Medalist Rating to Silver from Gold for its clean Z share class.

PGIM Jennison US Growth USD P Acc – Bronze from Gold

Chris Tate

The group of four managers steering this strategy has advantages, but we have lost some of the confidence in their capabilities to capitalize on the next growth cycle. Managers Kathleen McCarragher, Blair Boyer, and Michael Del Balso boast an enviable 139 years of collective industry experience but are all closer to the end of their careers. The generational gap within the management roster needs to be managed carefully to support the fourth manager, Natasha Kuhlkin, in the future. Jennison had to deal with the unfortunate passing of firm co-founder Sig Segalas in January 2023; He served as a manager here for more than 50 years. Additionally, Rebecca Irwin left the strategy in March 2023 and moved to Jennison's global equity team. Yet, the managers have solid support from a seasoned 12-member analyst team.

Good but not great execution from the managers has historically led to a respectable track record, relative to the competitive large-growth cohort. However, with the added risk considered— active positions have tended to be in more volatile stocks—the performance pattern has trended down during a period when growth stocks outperformed. While the approach is sound, reduced conviction in the team lowers the People rating to Above Average from High. The Morningstar Medalist Rating of PGIM Jennison US Growth Fund's clean P share class downgraded to Bronze from Gold while ratings for other share classes range from Bronze to Silver depending on fees.

Schroder ISF EURO Corporate Bond C Acc EUR – Neutral from Bronze

Schroder ISF Euro Corporate Bond remains a sound choice in the EUR Corporate Bond sector, continuing to benefit from a well-resourced team and a time-tested investment process. Seasoned lead portfolio manager Patrick Vogel has led the strategy since 2012 with strong results, albeit at times coming at a cost of a higher volatility. The team’s consistent theme-driven approach centred on fundamental credit research, as well as its stability, has however helped retain a competitive edge. While we maintained People and Process Pillar ratings at Above Average, changes in the competitive landscape within the Morningstar Category have resulted in the downgrade of the Morningstar Medalist Rating to Neutral from Bronze for its clean C Acc EUR share class. The ratings for other share classes range from Neutral to Silver depending on fees.

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