Upgrades
Allianz Europe Equity Growth – Silver
Barbara Claus
We have upgraded Allianz Europe Equity Growth to a Morningstar Analyst Rating of Silver. The fund had previously been rated 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 Large-Mid Growth and Europe Large-Cap Growth Equity Morningstar Category peers.
Downgrades
Robeco NV – Neutral
Jeffrey Schumacher
Robeco NV has been moved to a Morningstar Analyst Rating of Neutral. The fund previously held a Bronze rating. Our lower conviction in the fund is due to an ongoing change in the portfolio construction, which aims at a more concentrated portfolio going forward. This transition has been under way for some years, when the fund reduced the number of positions from 375 in 2008 to 100 by the end of 2015.
The managers, Mark Glazener and Dirk Hoozemans, aim to further increase portfolio concentration by taking larger bets on a smaller number of high-conviction ideas. We have no evidence that these managers can successfully run such a mandate, which requires a different mind-set, in our opinion, and superior stock-picking skills.
This, however, is the area in which the team has been struggling, with continuing weaker stock selection in a couple of sectors and in US stocks, in particular. This caused the fund to lag the MSCI World Index, despite comfortably outperforming the category average over the past five years. Although we still see some positive elements, such as Glazener’s experience, a dedicated analyst team, and the low fees, we need evidence that the more concentrated approach enables the managers to generate outperformance versus the benchmark.
New Ratings
AB FCP I Japan Strategic Value – Neutral
Don Yew
We have initiated coverage of AB Japan Strategic Value with a Morningstar Analyst Rating of Neutral. Katsuaki Ogata and Atsushi Horikawa have been comanaging 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.
Allianz Europe Equity Growth Select – Bronze
Barbara Claus
We have rewarded Allianz Europe Equity Growth Select with a Morningstar Analyst Rating of Bronze. The fund is run in keeping with the Select strategy, a more concentrated version of Allianz’s European Growth strategy, which is rated Silver. 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 more comfortable with a rating of Bronze for the time being.
BlueBay Emerging Market Corporate Bond – Neutral
Niels Faassen
We have initiated coverage on BlueBay Emerging Market Corporate Bond with a Morningstar Analyst Rating of Neutral. Polina Kurdyavko, head of BlueBay’s emerging-markets corporate team, has managed this fund since its inception in March 2008. She has over 15 years of industry experience and is the longest-tenured manager in the category. We appreciate Kurdyavko’s experience and her long tenure.
The fund aims to outperform its benchmark through bottom-up selection. In addition, the manager aims to make capital preservation a focus by actively managing the fund’s beta. However, we remain to be convinced of the quality of execution over time given some idiosyncratic events and detrimental beta positions in the recent past.
Legg Mason WA Global Bond – Neutral
Wing Chan
We have initiated coverage on Legg Mason WA Global Bond with a Morningstar Analyst Rating of Neutral. The fund is managed by an experienced and long-tenured team led by Kenneth Leech, Gordon Brown, and Andrew Cormack. They are supported by a 25-strong sovereign analyst team, which is one of the better-resourced teams in the space. The fund primarily focuses on global sovereign bonds, and we like how the process has a clear segregation of roles and responsibilities that leverages Western Asset’s depth of capabilities.
However, the fund is an approved product within the Singapore Central Provident Fund scheme, and the CPF’s restrictive mandate means that the team can be constrained in its ability to execute its best ideas. Although the fund delivered strong performance on a peer-relative basis, it was unable to outperform its customized benchmark over the past five years.
Legg Mason WA Macro Opportunities Bond – Neutral
Ashis Dash
We have initiated coverage of the Legg Mason WA Macro Opportunities Bond fund with a Morningstar Analyst Rating of Neutral. This punchy fund is led by a seasoned investor in Western’s CIO, Kenneth Leech, who is backed by deputy manager and Western’s head of derivatives, Prashant Chandran. The duo employs a strong team-based process that leverages Western’s full analytical resources.
The fund represents the team’s best ideas expressed through a high conviction portfolio. Since its inception in November 2013, the fund has delivered strong risk-adjusted performance versus its Morningstar Category even with its higher volatility.
However, its short track record along with the absence of an explicit return target, the fund aims at maximising total returns subject to a relatively high 10% volatility budget, and the lack of a comparable benchmark reflective of its flexible yet aggressive approach, make it hard to evaluate its success against the risk undertaken. This combined with its high fees limits our conviction despite our positive view on the managers and the team-based approach.
