Morningstar Fund Ratings: Weekly Round-up

BGF World Bond – Bronze

Carlos Lucar

Scott Thiel, BlackRock’s deputy CIO for fundamental fixed income, has managed this fund since January 2012. He also leads the firm’s nine-person global bond team that employs a disciplined duration-controlled, relative value approach here which aims to outperform the Barclays Global Aggregate Index USD-hedged by 100 basis points annualised over a market cycle. The strategy has a wide opportunity set that consists mainly of government and investment-grade corporate bonds, but it can also take small active currency bets occasionally. In our view, the backing of BlackRock’s deep resources is an advantage here. Moreover, we believe Thiel’s relevant experience and long tenure at the firm, which he joined in 2002, further enhances his ability to exploit the depth of resources at BlackRock and underpin our conviction in the fund.

BNY Mellon Emerging Market Debt Local Currency – Neutral

Shannon Kirwin

The fund’s two lead managers, Javier Mucio and Federico Garcia Zamora, have officially been at the helm for just 10 months, following the departure of former lead manager Alexander Kozhemiakin in February 2016. However, both have been involved with the fund for longer than that; Murcio joined as a comanager in 2007 and Zamora in 2013. Their tenure at the strategy has coincided with a period of underperformance, driven by unfortunately-timed duration and emerging-market currency underweights. Since taking over lead responsibility for the fund, the managers have tweaked the investment process to improve communication and idea-sharing within the team. So far, those changes haven’t perceptibly improved performance, but it’s too early to draw definitive conclusions. 

Fidelity China RMB Bond – Neutral

Don Yew

Hong Kong-based Bryan Collins has managed this fund since its inception on 7 December 2011. While Collins had no prior experience managing RMB bond portfolios, we take some comfort from his familiarity with Chinese issuers through managing Fidelity Asian High Yield, which has a Morningstar Analyst Rating of Bronze. He is supported by an eight-member Asian credit research team that is still expanding its onshore Chinese credit capabilities.

Although the investment process focuses on bottom-up credit selection and is broadly similar to that used at Fidelity Asian High Yield, we note that a key difference is the greater role of duration and yield-curve positioning as a source of active return for this fund. Hence, we need more time to see how Collins executes the investment process.

First State Asia Focus – Gold

Germaine Share

Although this fund was only launched on August 24 2015, topnotch portfolio manager Martin Lau has run the strategy via the Gold-rated First State Asian Equity Plus since 2003. He has 21 years of investment experience and has proved to be an expert investor not only on this strategy but also on several Greater China mandates. He is supported by an adept and stable team of 17 that is one of our favourite teams in the region. Lau and his team steadily apply a disciplined and robust, quality-focused investment process, which has proved to be successful over multiple market cycles. Along with competitive fees, we believe this offering encompasses many best-of-breed traits.

Nomura Funds Japan Strategic Value – Neutral

Don Yew

This fund has been managed by the highly-experienced portfolio manager Kentaro Takayanagi since its inception in January 2010. He has dedicated most of his 25-year investment career to managing Japanese equities and demonstrates deep knowledge of the Japanese equity market. He has managed the strategy at a Japanese-domiciled vehicle since July 2000, where he has delivered solid returns. He receives solid support from an experienced six-member team of portfolio managers dedicated to this strategy, as well as one of the biggest buy-side Japanese equity research teams in the category. However, with assets under management of USD 5.2Bn as of June 2016, this strategy is one of the biggest in the category. Given its flexibility to invest in small-caps, we are cautious on the team's ability to manage liquidity risk at such an elevated asset level.

Upgrades

Schroder Asian Total Return (ATR) – Gold

Germaine Share

Veteran managers Robin Parbrook and King Fuei Lee have led this closed-end fund since March 2013. They have a longer track record at the strategy’s SICAV vehicle, Schroder ISF Asian Total Return, which they have comanaged since its inception in November 2007. 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 comfortably outperformed the MSCI AC Asia Pacific ex Japan Index since April 2013, while offering unparalleled downside resilience.

The longer and equally impressive track record on the SICAV vehicle further strengthens our conviction. Overall, we believe the fund possesses several best-of-breed traits.

Stewart Investors Indian Subcontinent – Silver

Mark Laidlaw

Increased conviction in the team and process behind Stewart Investors Indian Subcontinent have resulted in a rating upgrade. The portfolio management duo of Sashi Reddy and David Reddy have worked together on the strategy since 2009 and their insights are amongst the sharpest in the peer group. They also get strong support from the strong team at Stewart Investors. The process here has proven its worth over time. It is a discerning bottom-up approach with a key focus on sustainability which is seen through three lenses – sustainable goods and services that have a positive impact on society, responsible finance, and required infrastructure. The track record is excellent, particularly during times of market duress. There are multiple strengths on show here.

Downgrades

Aberdeen Asia Pacific and Japan Equity – Bronze

Aberdeen Asia Pacific Equity – Bronze

Aberdeen Asian Income (AAIF) – Bronze

Aberdeen Global Asia Pacific Equity – Bronze

Mark Laidlaw

Our conviction in the Aberdeen Asia Pacific team has wavered, whilst peer competition has been getting stronger, resulting in an overall drop in our conviction levels. Both the Asian equities and the Japan equities teams have seen some turnover within the ranks over the last few years. That said, Flavia Cheong still leads a quality outfit, which is well resourced and flat structured, with many of the team having spent their whole investment career at the firm. Nonetheless, we feel they are no longer seen as one of the elite groups in this space. The investment process is tried and tested – quality and valuation the major keys. Aberdeen is a patient investor who is willing to back quality businesses that are well managed.

A potential criticism is that the team hasn’t always been critical enough when looking at the continued merits of some long-term holdings where the investment thesis has started to deteriorate. We are encouraged by the measures put in place by the team to help potentially alleviate this issue. Significant outflows, which are down from peak levels, has lessened previous capacity concerns. Whilst we retain conviction in the funds, we do feel there are more compelling choices available.

Montanaro UK Smaller Companies (MTU) – Neutral

David Holder

Whilst we are reassured to see the return of Charles Montanaro as the driving force in the day-to-day management of this fund, we are concerned that shareholders have had a series of short-tenured managers here recently. This has been unsettling for investors and has led to small but discernible changes to both the investment approach and portfolio implementation. We feel it prudent to reduce the rating on the fund pending a period of ongoing stability.