Among 155 strategies assessed, Morningstar upgraded the ratings of five funds, downgraded seven, placed eight under review and rated 28 funds for the first time.
The winners in the review included the BlackRock Emerging Markets Fund, an equity fund whose lead manager Gordon Fraser had his analyst rating lifted to bronze from neutral. The Pimco Emerging Markets Bond Fund was among the losers, with a downgrade to neutral from bronze.
The ratings, which are forward-looking, are graded on a five-tier system, with three positive ratings of gold, silver and bronze, plus a neutral rating and a negative rating. They are based on an analyst’s conviction in the fund’s ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over a full market cycle of at least five years.
Fraser, who Morningstar described as “talented”, took over the reins of the Blackrock fund in March 2017 and relocated to Hong Kong from London a few months later to join the 40-member global emerging markets fundamental equities team led by Andrew Swan.
His style is agnostic, combining a top-down and bottom-up approach, but his country and sector allocations typically stay within 10 percentage points of the fund’s MSCI Emerging Markets benchmark index, according to Morningstar.
The fund has outperformed both the index and the average return of other emerging market equity funds available to Hong Kong and/or Singapore retail investors.
Its three-year cumulative performance is 44.65%, compared with 36.51% and 28.28% respectively for the index and sector, according to FE Analytics data.
Its annualised volatility of 14.59% is two percentage points higher than the sector average, but slightly lower than the index (14.80%). However, the fund’s ability to deliver alpha of 2.92 has helped boost risk-adjusted returns. It has a Sharpe ratio of 0.68, which is better than the sector average of 0.45.
“Overall, [the fund’s] approach is reasonable, but its success is heavily reliant on Fraser’s intuition and experience,” Morningstar noted.
However, his flexible investment style means that the strategy doesn’t have a predictable performance pattern, “which could make it more difficult to own”, warned the investment research firm.
Blackrock GF Emerging Markets Fund vs sector average and benchmark
Pimco down a notch
The outperformance of the Pimco Emerging Markets Bond Fund against both its index and peers wasn’t enough to prevent Morningstar downgrading its analyst rating to neutral from bronze.
It has achieved 14.51% three-year cumulative return, exceeding its benchmark (13.11%) and its Hong Kong/Singapore authorised mutual fund peer average (10.47%).
However, “persistent turnover on the investment team warrants caution”, according to Morningstar, a point that prompted the downgrade.
The fund’s long-term manager Mike Gomez left this month for a sabbatical and another veteran on his team, Francesco Balcells, left a month earlier. In total, the fund has had 10 departures and 10 hires over the past five years, according to Morningstar.
“The firm continues to attract experienced emerging-markets investors, but it does not seem that the dust has settled on the team’s current configuration,” it noted.
Pimco Emerging Markets Bond Fund vs sector average and benchmark
Among the other funds authorised for sale to Hong Kong and Singapore retail investors whose ratings changed were:
–The Wells Fargo Worldwide Emerging Markets Equity Income (upgraded to bronze from neutral)
–The Templeton Global Balanced (downgraded to neutral from bronze)
–First-timers included the Morgan Stanley Global Opportunity Fund (graded bronze).