Morningstar Asia fund reviews and re-ratings – October 2017

The research firm’s “analyst rating” is forward-looking. On an annual basis, analysts review and, if necessary, re-rate the funds on a five-tier scale with three positive ratings of Gold, Silver and Bronze, a Neutral rating and a Negative rating.

The analyst rating differs from the firm’s backward-looking “star rating”, which assigns one-to-five stars based on a fund’s past risk- and load-adjusted returns versus category peers.

Analyst ratings for October

Source: Morningstar

New ratings

1. NN (L) Euro Fixed Income (available for sale in Singapore)

Coverage initiated with a Bronze rating. With long-tenured managers Sylvain de Ruijter and Hans van Zwol at the helm of this fund, we feel this team has what it takes to run the strategy effectively. De Ruijter and Van Zwol have been responsible for the day-to-day management of this fund since September 2001. They have successfully applied a time-tested and diversified process, with a modest risk budget. On top of that, the fund is slightly cheaper than the average peer.

-Niels Fassen, senior Analyst for manager research

2. PIMCO GIS US Investment Grade Corporate Bond (available for sale in Singapore)

Coverage initiated with a Bronze rating. The fund’s advantages include the tenacity of its veteran lead manager, the support of a large group of corporate managers and analysts, and a versatile process that draws on the firm’s robust macroeconomic and fundamental research. On the other hand, the fund’s high fees are a structural hurdle limiting the magnitude of its potential outperformance, which reduces its appeal to some extent.

-Mara Dobrescu, associate director for fixed income strategies for manager research

Upgrades

1. PIMCO GIS Global High Yield Bond (available for sale in Hong Kong and Singapore)

Upgraded to Silver from Bronze. Prudence is the watchword here. Lead manager Andrew Jessop keeps this fund focused on the higher- quality end of the high-yield spectrum. While the fund has delivered compelling risk-adjusted returns under Jessop’s watch, its conservative profile explains much of its peer-relative performance: a tendency to protect during credit market downdrafts and lag during rallies. PIMCO High Yield’s experienced management team, led by Jessop, plies a straightforward and risk-aware process. The firm’s deep analyst bench further supports our increased conviction in the fund.

-Niels Faassen, senior analyst for manager research

2. Xtrackers MSCI USA ETF 1C (Lux) (available for sale in Hong Kong and Singapore)

Upgraded to Silver from Bronze. We take a positive view on the strategy as defined by the MSCI USA Index, as it has proved difficult to beat by active managers over time. Also, despite not being one of cheapest passive funds in the category, the ETF has delivered solid outperformance relative to both active and directly comparable passive peers.

-Monika Dutt, analyst for passive strategies for manager research

3. BGF Emerging Markets Bond (available for sale in Hong Kong and Singapore)

Upgraded to Bronze from Neutral. With Sergio Trigo Paz and Michel Aubenas, this fund benefits from a stable core of decision-makers. They apply a proven process, which allows the team to implement high-conviction active positions with a focus on limiting drawdowns. The process combines an awareness of the global environment with in-depth country analysis. The managers are also aware of the potential impact of exogenous global factors on emerging-markets bonds and therefore undertake ongoing scenario analysis through a “global weather station” model to identify potential “storms”. All in all, the team’s effective application of an active yet risk-controlled process makes this a solid offering within its peer group.

-Niels Faassen, senior analyst for manager research

4. PIMCO GIS Global Investment Grade Credit (available for sale in Hong Kong and Singapore)

Upgraded to Silver from Bronze. Its advantages include the tenacity of its veteran lead manager, the support of a large group of corporate managers and analysts, and a versatile process that draws on the firm’s robust macroeconomic and fundamental research. While the fees charged here are above the industry norm, investors who can access the fund’s rebate-free share class get a somewhat better deal. We believe this multifaceted approach will continue to serve investors well.

-Mara Dobrescu, associate director for fixed income strategies for manager research

5. Robeco Emerging Markets Equities (available for sale in Hong Kong)

Upgraded to Silver from Bronze. This fund is in the hands of a very experienced emerging-markets skipper. Wim-Hein Pals has accumulated almost three decades of experience, mostly spent managing equity portfolios invested in emerging markets at Robeco. He is supported by a stable bench of experienced analysts and fund managers. The fund delivered underwhelming results from 2010 to 2013, but we think the fund manager effectively tackled the issue by taking a more active stance. The portfolio is more concentrated, and its active share has gained 20% in the past five years with a positive effect on performance. With the same disciplined process blending top-down country allocation with bottom-up stock selection, we believe that the fund has more potential than before.

-Mathieu Caquineau, senior analyst for manager research

Downgrades

1. Franklin European Small-Mid Cap Growth (available for sale in Hong Kong and Singapore)

Downgraded to Neutral from Bronze. The fund has been managed by Ed Lugo since July 2006. He is the lead portfolio manager of the global small-cap team at Franklin, which comprises six individuals. In addition to this mandate, the team is responsible for global and international (global ex-US) smaller-cap strategies, and the international strategy is home to the majority of the team’s assets. The unconstrained approach can lead to the make-up of the fund differing significantly from the index and peers, and the portfolio is concentrated in 25-35 names. The limited diversification increases the importance of getting individual stock calls correct, but attribution analysis shows that stock selection has been below par for a number of years. The weakness in relative returns has somewhat dented our confidence in the portfolio construction and stock-picking approach employed here, where stock selection is expected to drive performance, and we believe there to be more appealing options available to investors seeking exposure to the European small-cap space.

-Samuel Meakin, analyst for manager research

2. Investec Global Equity / Investec GSF Global Equity (available for sale in Hong Kong)

Downgraded to Neutral from Bronze. This strategy is managed by Investec’s four-factor team, with the oversight of the head of the core strategy. Up until he stepped back from portfolio management in June 2017, this role was undertaken by James Hand. He was replaced by Rhynhardt Roodt and Jonathan Parker, who now co-heads the core strategy. Both Roodt and Parker have experience in the four-factor approach but limited global equities experience. While the approach combines a quantitative model and fundamental research from the team, final stock selection and portfolio construction lies with Roodt and Parker. In an acknowledgement that the core strategy has been less effective than other four-factor strategies, they have already made some changes. While we welcome efforts to improve the effectiveness of the strategy, given the new co-managers’ limited experience in global equities, we have little visibility as to whether they will be successful. The fund’s Morningstar analyst rating is therefore lowered to Neutral, while we await the impact of the new co-managers’ efforts to improve the effectiveness of the core strategy.

-Peter Brunt, senior analyst for manager research

3. Fidelity Italy (available for sale in Hong Kong and Singapore)

Downgraded to Bronze from Silver. Our diminished conviction in this fund stems from our concerns about the manager’s large workload. The fund’s skipper, Alberto Chiandetti, continues to be sole lead manager on Fidelity Switzerland (since 2011) and on the Europe ex-UK strategy Fidelity European Opportunities (since 2014). Although he does receive support from a dedicated analyst on the country funds, in addition to Fidelity’s wider European research team, we think his current responsibilities are too wide given the small overlap across his funds’ investment universes and the fact that his stock-selection process rests on deep fundamental research. The inconsistent performance across the funds managed by Chiandetti in the past three years is also a warning signal. Overall, we remain positive given the fund’s solid process, relatively decent fees, strong parent, and the manager’s proven track record in this asset class, but we think that his heavy workload may have an impact on his ability to be as successful on this fund as he was in the past.

-Francesco Paganelli, analyst for manager research

4. Franklin Mutual European (available for sale in Hong Kong and Singapore)

Downgraded to Bronze from Silver. Franklin Templeton Investments announced in October 2017 that Philippe Brugère-Trélat will retire and step down from the fund on May 1, 2018. He has three decades of investment experience, mostly in European equity, and has successfully managed this strategy since 2005. While we think the fund is losing some appeal as a result, we still see it as an attractive option. Katrina Dudley, who has been the fund’s official co-pilot since 2007, will take over. She is well-versed in Mutual Series’ management style, having joined the firm in 2002. Starting from January 2018, Mandana Hormozi will co-manage the fund with Dudley. Their collaboration is untested, but we find it reassuring that Hormozi has also been with the firm for more than 10 years. The main challenge awaiting the duo will be to turn performance around, as the fund is currently facing strong headwinds. We are confident in their ability to do so, given the good long-term track record of the strategy and the backing they receive from the deep and tenured team at Franklin Mutual Series.

-Mathieu Caquineau, senior analyst for manager research