Looking for a diamond in the rough? A star that has not realised its potential? Welcome to Fund-Factor – a bit like that well-known singing competition, only instead of people’s voices we’re talking portfolio choices.
Morningstar fund analysts award a Gold, Silver or Bronze rating to funds which they think will outperform their sector peers over the medium to long term. This is not a buy rating – it is up to the investor to decide whether they would like to add a particular asset class or geographical exposure to their existing investments, but once that decision has been taken, analyst fund ratings highlight the best in show. A Gold rating denotes that the analyst has the highest conviction in the fund, followed by Silver and then Bronze.
A fund’s star rating indicates how it has performed in recent history compared to the peer group average. If a fund has a five-star rating it has significantly outperformed its peers, if it has a one-star rating it has significantly underperformed.
All things being equal, medallist funds should be five-star rated. If they have had a period of underperformance, this could be a good opportunity for long-term contrarian investors.
Using Morningstar’s free Fund Screener, we have identified three of these funds – highly rated, but performing below par. If you are looking for an investment in these sectors, these could be a worthy addition to your portfolio.
Artemis UK Special Situations
This Gold Rated fund has struggled over the past two years, delivering flat returns to investors. Prior to that, the fund had a stellar two years, gaining 28% in 2013 and 18% in 2012. This bumpy ride is to be expected; performance can be volatile due to the portfolio's significant weighting in small- and mid-cap stocks and the slightly contrarian approach.
Morningstar analysts say this is a standout offering in the UK equity space, with a highly experienced manager and a strong track record. The fund is a specialist mandate with a mid- and small-cap bias, and the managers seek companies that are undergoing change, the potential for which is unrecognised by the market.
Polar Capital Japan
Despite recent underperformance, this Silver Rated fund continues to benefit from its managers' experience and their pragmatic approach, which has led to strong returns over the long term, says analyst Lena Tsymbaluk.
James Salter founded Polar Capital’s Japanese franchise with this fund’s launch in 2001 and has since handpicked his supporting team. The investment process is a combination of value and growth-at-a-reasonable-price.
The team seek to identify stocks trading below fair value and supplement this with qualitative analysis. It is reasonably flexible in investing across the market-cap spectrum according to the areas where it finds value.
Investec Cautious Managed
This is a highly populated – and highly popular – sector. As investors with smaller portfolios opt to self-invest rather than seek professional advice, these multi-asset blended portfolios are seeing considerable inflows.
With a Silver Rating, Morningstar fund analysts consider this fund to be one of the better offerings. Alastair Mundy is always mindful of his “cautious” investor base when taking decisions in the portfolio, say analysts. The portfolio is built around a traditional mix of equities, bonds, and cash as he believes this gives him sufficient diversification.
This approach has served investors well over the long term and the fund has a good record under Mundy’s stewardship.
