Morningstar Asia fund reviews and re-ratings – November

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Upgrades for Allianz, Fidelity, First State, Schroders and Templeton and coverage initiated on several others, together with the new “sustainability rating”.

Morningstar Asia fund reviews and re-ratings - November

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 1-to-5 stars based on a fund’s past risk- and load-adjusted returns versus category peers.

Morningstar’s sustainability rating, which was launched in March, helps investors evaluate how well the companies in a fund’s portfolio are managing environmental, social and governance (ESG) risks and opportunities.

Analyst ratings for November


1. AB FCP I Japan Strategic Val A

We have initiated coverage with a Neutral rating. Katsuaki Ogata and Atsushi Horikawa have been co-managing this fund since March 2012, but Horikawa will assume sole portfolio management responsibilities from 1 April 2017 after Ogata retires from AB. Given Horikawa’s extensive involvement in this strategy, we think that he is well qualified to take the lead on this fund. Furthermore, strong research support is provided by a stable and well-experienced seven-member analyst team that aims to seek out undervalued companies whose long-term earnings potential has been mispriced. Although the investment process has delivered respectable returns over the long term, we have some reservations around the fund’s risk-management process. As it is coupled with a relatively expensive fee of 1.84%, we think there are better options in this space.

–Don Yew, analyst, manager research

2. Allianz Europe Equity Growth AT EUR

Upgraded to Silver from Bronze. The fund is run with a tried-and-tested process that was established in 2003. Our conviction in the approach has grown over time. We have seen that it has been well-executed since October 2009 by a stable and capable management team, matching earlier results and making the fund’s risk-adjusted returns stand out from benchmark S&P Europe LargeMid Growth and Europe Large-Cap Growth Equity Morningstar Category peers.

— Barbara Claus, fund analyst

3. Allianz Europe Equity Growth Sel A €

Coverage initiated with a Bronze rating. The fund is run with the select strategy, a more concentrated version of Allianz’s European growth strategy, which is Silver-rated. The difference from the core strategy is that the portfolio is more concentrated, having only 35-40 holdings and generally higher position sizes in single stocks. The fund has done well so far matching the results of the core strategy, but the differences in the approach, which has been in place for around three years, make us stay with the more cautious rating of Bronze for the time being.

–Barbara Claus, fund analyst

4. BGF Asia Pacific Equity Inc A2 USD

Coverage initiated with a Neutral rating. Co-managers Oisin Crawley and Chris Hall have been at the helm for a relatively short time, joining the roster here on 2 July 2014 and 30 June 2015, respectively. They use a style-agnostic investment process to achieve a portfolio dividend yield target of 4% over the market cycle. They have brought a few enhancements to the process, such as introducing a more structured framework to analyse dividend strategies. While this has resulted in encouraging fund returns so far, it is still early days and we need more time to build our conviction.

–Germaine Share, senior analyst, manager research

5. Eastspring Inv Japan Dynamic A

Coverage initiated with a Bronze rating. This strategy (via the institutional share class) has been managed by Dean Cashman since its inception on 5 July 2006. Cashman has dedicated most of his 28-year investment career to managing Japanese equities, and we hold him in high regard. He is also one of the founding members of the Japan equity team, which is one of the most experienced among peers. The fund employs an unconstrained strategy towards investing in the Japanese equity market and has delivered excellent long-term returns. We note that the fund is currently soft-closed to new investors – a prudent step towards managing capacity, in our opinion, given the fund’s concentrated portfolio and considerable allocation to smaller-cap stocks.

–Don Yew, analyst, manager research

6. Fidelity US High Yield A-USD

Upgraded to Silver from Bronze. We believe manager Harley Lank, who has been at the helm since 2003 and effectively navigated various credit cycles, brings significant experience in US high-yield investing and executing Fidelity’s research-intensive process. He is backed by one of the best-resourced high-yield analyst teams in the industry, which, in our view, is essential to the success of this bottom-up driven strategy. This combined with the fund’s strong long-term performance relative to peers has increased our conviction in this flexible, yet responsibly implemented core US high-yield bond approach.

–Carlos Lucar, analyst, manager research

7. First State Indian Subcontinent I

Upgraded to Gold from Silver. Vinay Agarwal and the team at First State Stewart Asia are our highest-conviction pick when it comes to Indian equities. The portfolio manager boasts an impressive level of understanding at both the macro and individual stock level. He can call on support from the wider investment team led by Martin Lau, one that we think is amongst the best in the region. Agarwal applies a process that is used across strategies managed by the FSSA team and has proved to be successful over time. A robust buy-and-hold approach searches for potential ideas based on quality, a firm’s ability to deliver sustainable and predictable growth, and, importantly, strong management. The focus is on absolute returns, rather than relative returns, and preservation of capital is a primary consideration. The resulting track record is most impressive, comfortably eclipsing both the index and peer groups over all time frames. We feel First State Indian Subcontinent is one of the best-in-class in what is considered a very competitive landscape with a number of high-quality options.

–Mark Laidlaw, senior analyst, manager research

8. HSBC Asian High Yield Bond AC HKD

Coverage initiated with a Neutral rating. This fund has been co-managed by Cecilia Chan and Alfred Mui since its inception on 20 May 2011. Although Chan is a named portfolio manager, day-to-day management of this fund rests with Mui, who offers broad fixed-income portfolio management experience that is beneficial to managing this fund. However, we have some concern around the stability of the Hong Kong-based Asian credit research team and would like to see the team settle down. We also have some reservations around the fund’s use of a custom benchmark with 30% allocation to sovereign and quasi-sovereign debt sectors, which introduces sovereign risk to the portfolio and may lead to a risk-and-return profile different from category peers. Although the fund has delivered strong peer-relative returns since Mui started managing the fund, we note that comparison with peers is less meaningful given the fund’s exposure to sovereign debt.

–Don Yew, analyst, manager research

9. Manulife GF Asian Small Cap Eqs AA

Coverage initiated with a Neutral rating. Portfolio manager Linda Csellak has managed the fund since 1 April 2010. She has more than 21 years of Asian equities investment experience, with most of those years dedicated to small- cap investing. We like that she is very hands-on with stock research, and has delivered impressive returns over her tenure. She uses a growth-at-a-reasonable-price-focused investment process to select stocks. While this seems sensible, we need more time to gain comfort around how she and the dedicated small-cap analyst qualitatively stay on top of a diversified portfolio of 100-150 names, which has a high annual portfolio turnover of 200-300%.

–Germaine Share, senior analyst, manager research

10. Pictet-Asian Local Currency Dbt P USD

Coverage initiated with a Neutral rating. This fund is comanaged by Wee- Ming Ting, Philippe Petit, and Simon Lue-Fong; however, day-to-day management responsibilities lie with Singapore-based Ting and Petit, who have managed the fund together since July 2007. Together, and with the addition of Carrie Liaw in May 2015, we consider the breadth and depth offered by the three-member Singapore-based investment team average on a peer-relative basis. The fund uses a well-established investment process that is employed across Pictet’s emerging-markets-debt strategies and has delivered respectable peer-relative returns over the long term.

–Don Yew, analyst, manager research

11. Schroder ISF Asian Eq Yld A Acc

Upgraded to Silver from Bronze. This strategy has been managed since inception and was the brainchild of portfolio manager King Fuei Lee, who has spent his whole investment career at the firm. Aiming to deliver attractive returns with a lower level of risk, there are a number of strengths here that are behind our increased conviction. The process is robust and proven its worth over time – focusing on stocks with sustainable and growing dividend streams, rather than using a specific minimum yield target. The depth of insights provided by Lee and the Asia Pacific ex-Japan investment team at Schroders are impressive. Schroder’s has delivered on the performance front – trailing returns are attractive relative to peers on a risk-adjusted basis, and standing out in times of market duress. Schroders ISF Asian Equity Yield is an excellent choice, particularly for more risk-conscious investors.

–Mark Laidlaw, senior analyst, manager research

12. Schroder ISF Asian Total Ret A

We have initiated coverage with a Gold rating. Veteran managers Robin Parbrook and King Fuei Lee have co-managed the fund since its inception. They have spent their respective 26- and 17-year investment careers exclusively with Schroders, and we hold them both in high regard. They use a rigorous, quality-growth-focused stock-selection process with a hedging overlay to mitigate market risks. They have used the process to good effect: The fund has immensely outperformed the reference benchmark and peers since its inception, while offering unparalleled downside resilience. Overall, we believe the fund possesses a number of best-of-breed traits that are not to be missed.

–Germaine Share, senior analyst, manager research

13. Templeton Emerging Markets A Ydis USD

Upgraded to Neutral from Negative. We are optimistic about the appointment of strategy leads Chetan Sehgal and Carlos Hardenberg, who have built strong track records on the Templeton Emerging Markets Group’s emerging-markets small-cap and frontier-markets strategies, respectively. As strategy leads, they are mandated to ensure greater consistency among the various vehicles under the Templeton emerging-markets strategy. To that end, they took over the UK-listed Templeton Emerging Markets Investment Trust in late 2015 and have delivered promising returns so far. While Dennis Lim and Tom Wu remain named managers on the fund, we are encouraged by the oversight provided by Sehgal and Hardenberg. The strategy leads have brought about sensible improvements to the investment process, which focuses on stocks that appear cheap relative to their five-year projected earnings potential. This includes increasing the number of portfolio holdings to mitigate concentration risks and introducing portfolio construction guidelines around sector and country allocations. Given a number of enhancements being made to the fund, we believe it deserves a second chance.

–Germaine Share, senior analyst, manager research

14. Templeton Frontier Markets A Acc USD

Coverage initiated with a Neutral rating. Carlos Hardenberg, David Haglund and Ahmed Awny have been responsible for the day-to-day management of this fund since its inception in October 2008. Hardenberg also manages the closed-end Templeton Emerging Markets Investment Trust and has delivered promising returns so far, while Haglund and Awny are experienced investors in the Middle East and North African regions. As with other Templeton emerging markets offering, the managers here focus on stocks that appear cheap relative to their five-year projected earnings potential. This has produced a strong track record relative to the MSCI Frontier Markets Index, but peer-relative returns have been less impressive. Overall, we believe the fund has the makings of an interesting offering but we would like more time to build our conviction.

–Germaine Share, senior analyst, manager research

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