This article is part of Morningstar's Guide to Passive Investing, helping investors make smart choices to meet their long-term investment goals.
Even top rated funds can fall-short of investors’ expectations in times of uncertainty – and savvy investors will know it is times of uncertainty which create buying opportunities. Using the Morningstar Analyst Rating, investors can gauge whether an investment trust is high quality and suffering a temporary slip, or simply no good.
Morningstar fund analysts base their ratings on five quantitative and qualitative factors; price, performance, investment process, the fund manager and quality of the parent company.
A Gold, Silver or Bronze analyst rating implies that a fund has the potential to outperform its peers over the long term. While it is up to the individual investor to choose what asset class, country or sector they want to add to their portfolio, a Morningstar Analyst Rating will then reveal which fund in that category is the best-in-class and likely to beat its rivals in the future.
Unlike the medal rating, a fund’s star rating is backward looking and quantitative – based purely on performance ranked against peers. A one-star rating means it has underperformed the sector average, while a five-star rating means it is a top performer.
Using the two ratings together investors can find potential value opportunities – top rated funds which have recently underperformed peers. Using Morningstar Fund Screener, we found three Bronze, Silver or Gold Analyst rated investment trusts that with either a one or two-star performance rating.
BlackRock World Mining Trust
BlackRock World Mining Trust (BRWM) is Silver Rated by Morningstar analysts. It is trading at 12.2% discount and it yields 4.6%. It has gained 80.2% year to date, outperforming the category average by 25%.
Recent years have been challenging for this trust's management and its shareholders, Morningstar analyst Fatima Khizou said.
The fund manager Evy Hambro focuses on more-mature businesses that are in or on the cusp of production rather than on junior mining companies. The amount and growth of future dividends will depend on the portfolio's underlying companies, and, given that many producers have cut or cancelled their dividend, the level is closely monitored.
But Khizou believed that the management team at the fund is highly experienced and has been successful in applying the outcome of its bottom-up and top-down analysis, and investors here have been well compensated over the long term.
She continued to believe that the BlackRock’s team in one of the best resourced in the sector, underpinned by its experience and knowledge.
The fund is not overly expensive, with its ongoing charge below the category average.
JP Morgan Smaller Companies
JP Morgan Smaller Companies (JMI) is Bronze Rated by Morningstar analysts, trading at a 19.6% discount with a two star rating. It losses 9.4% year to date, lagging behind its UK Small-Cap Equity category by 8.6%.
Morningstar analyst Samuel Meakin believes that this fund has merit for investors seeking UK small-cap equity exposure.
This fund benefits from an experienced lead manager, Georgina Brittain, who has been working in UK small-cap equities for almost 21 years. Meakin said Brittain has stayed true to the fund investment style throughout different market cycles, which is holding significantly higher exposure to small caps and micro-caps when compared with its average category peers.
The fund has outperformed its benchmark over the 10-year period and is broadly in line with the category average over this time, Meakin added. The fund enjoyed a good year in 2015 with 26% advances, with strong stock selection across a number of sectors contributing to the fund’s outperformance of the benchmark and category average.
Montanaro UK Smaller Companies
Montanaro UK Smaller Companies (MTU) is Bronze Rated by Morningstar analysts while the fund obtains a two star performance rating. It is trading at a 24.1% discount and has lost 10.5% so far in 2016. Its performance lags behind its UK Small-Cap Equity category average by 8.6%.
After a number of manager changes over recent years, Morningstar analyst David Holder said he is happy to see Anna Lunden firmly in place as a sole manager for the fund.
“Lunden is the firm's head of investments and brings some 15 years' experience in European small-cap investing,” Holder said.
The main risk comes from the fund's objective to invest in small companies, where business risk is high. However Lunden seeks the highest-quality, growth stocks. The aim of the fund is to find growing companies in niche areas with strong balance sheets, cash flows, and dividend yields.
The fund also has a focus on the UK domestic consumers with holdings in property companies, housebuilders, and funeral services. It had a strong year in 2015, gaining 24.7% in the year alone, as investors sought out high quality investments in response to economic uncertainty.
With an ongoing charge of 1.2% in the fund, Holder said investors are paying a reasonable, but not cheap fee for active and specialist management.
