New Ratings
Templeton Frontier Markets – Neutral
Germaine Share
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.
Upgrades
First State Indian Subcontinent – Gold
Mark Laidlaw
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.
Downgrades
First Eagle Amundi International – Neutral
Thomas Lancereau
First Eagle, the firm sub advising this fund’s management, has had a change in ownership. Its founding family is now a minority shareholder, as private equity firms Blackstone and Corsair combined to buy 58% of the firm. In addition, the success of the strategy has led to strong inflows over time, and ideally, it should be closed to preserve its flexibility, as it is now more difficult to take significant positions in individual smaller-cap stocks. This element is adding to our long-standing concerns on the fund’s fee structure. Ongoing charges are not only above average here but they also come with a performance fee whose hurdle is linked to LIBOR rather than to an equity index as one would expect given the portfolio’s positioning.
Invesco Perpetual Global Smaller Companies – Neutral
Peter Brunt
The fund’s regional allocation has been structurally at odds with its performance benchmark for some time, which has had a significant impact on returns. We believe that this stance has had too great an influence on performance, and does not play fully to the fund's strengths. Each underlying manager is well equipped in running the underlying sleeves in their own right; but we believe that there could be more structure in bringing each of them together in aggregate, and with regards to regional allocation given the fund's performance objective.
