New Ratings
Investec GSF Global Franchise – Neutral
Peter Brunt
The fund is managed by a reasonably experienced investor in Clyde Rossouw, who has been at the helm since August 2011. He follows a structured approach to investing, which aims to identify quality companies that can grow their cashflows sustainably over time. We like the process' clear structure and scalability (focusing only on stocks capitalised above USD 3 billion), but note that its implementation has resulted in a portfolio skewed to a small number of sectors in the past, including a significant overweighting to consumer staples. This proved broadly beneficial to performance as those sectors experienced tailwinds, but also brought concentration risk.
We are pleased to see that the portfolio has become more diversified under Rossouw's management, but note that relative performance has still been reliant upon stock selection within the consumer staples space. While we believe that this fund has potential, we would like to see more evidence of Rossouw and the team's ability to consistently add value across a broader investment set.
MFS Investment Funds Global Concentrated Equity – Silver
Natalia Wolfstetter
This fund has a sturdy foundation for continued success even as star co-manager David Mannheim’s retirement looms. Fellow manager Roger Morley has shown his credentials since rising to this role in mid-2009, applying a disciplined stock-selection process that is both rigourous and repeatable. Ryan McAllister has been a full time co-manager on this strategy since March 2017.
Mannheim is expected to retire towards the end of 2017. McAllister’s portfolio management experience is mostly limited to the energy sector. This engenders some uncertainty. Still, MFS deserves credit for its early, considered, and transparent approach to succession. Morley’s successful shift from seasoned MFS equity analyst to co-manager is a template the shop hopes McAllister will replicate. Importantly, a well-resourced analyst team provides a foundation for sound decisions.
Staff take great care to identify the most robust companies within its investable universe, whittling this down to 20-30 stocks.
It remains to be seen how well McAllister settles into the co-manager role, but this fund remains superior in many respects. We initiate coverage with a ‘Silver’ rating, which is in keeping with the fund’s Silver-rated siblings, Australia-domiciled MFS Global Concentrated Equity Trust and Luxembourg-domiciled MFS Meridian Global Concentrated.
MFS Investment Funds Global Equity – Silver
Natalia Wolfstetter
This fund has a structure that can succeed even as its star co-manager David Mannheim’s exit nears. Fellow manager Roger Morley has shown his credentials since rising to this role in mid-2009, applying a disciplined stock-selection process that is both rigourous and repeatable. Ryan McAllister has been a full-time co-manager on this strategy since March 2017. Mannheim is expected to retire towards the end of 2017. McAllister’s portfolio management experience is mostly limited to the energy sector. This engenders some uncertainty.
Still, MFS deserves credit for its early, considered, and transparent approach to succession. Morley’s successful shift from seasoned MFS equity analyst to co-manager is a template the shop hopes McAllister will replicate. Importantly, a well-resourced analyst team provides a foundation for sound decisions. Staff take great care to identify the most robust companies within its investable universe, resulting in a diverse, 80- to 100-stock portfolio that looks little like the benchmark.
It remains to be seen how well McAllister settles into the co-manager role, but this fund remains close to the top choices in the field. We initiate coverage with a ‘Silver’ rating, which is in keeping with the fund’s Silver-rated siblings, Australia- and US-domiciled MFS Global Equity Trust and MFS Global Equity, and Luxembourg-domiciled MFS Meridian Global Equity.
Mirae Asset Asia Sector Leader – Neutral
Mark Laidlaw
We feel this strategy shows promising signs but doesn’t yet have the credentials of our preferred strategies in this space. Portfolio manager Rahul Chadha has led the team since 2010 and has built both the team and process. We feel he’s a solid investor who is backed by an investment team that has a broad mix of experience. The investment philosophy is centred on the belief that the Asian consumer story is the best way to play the long-term secular growth in the region. The portfolio is conviction based and will have significant country/sector biases relative to peers and the index. An attractive fee is also a positive here. We’d expect our conviction to grow over time if the strategy shows its ability to deliver over multiple market conditions.
Upgrades
Fundsmith Equity – Gold
Peter Brunt
Terry Smith co-founded Fundsmith LLP and launched this fund in 2010 on the back of the success he achieved as investment advisor to Tullett Prebon's pension fund. His investment philosophy is to buy and hold, ideally forever, high-quality businesses that will continually compound in value. In practice, this results in a very high-conviction portfolio with a very long-term time horizon, which has elements of sector concentration and valuation risk. We believe Smith has a good handle on the risks, however, and over the long term will serve investors well. While returns have benefited from style tailwinds since launch, we believe Smith has added significant value above and beyond the fund's style bias. His track record on the Tullett Prebon pension fund also highlights his ability to add value over a market cycle. In light of this, our conviction has grown considerably in the fund.
Downgrades
Franklin Mutual Beacon – Neutral
Francesco Paganelli
Following a recent change in the fund’s process, we have downgraded Franklin Mutual Beacon to a Morningstar Analyst Rating of Neutral. The fund previously held a Bronze rating. Its process and portfolio used to mirror the U.S. version of the strategy, Franklin Mutual Shares MUTHX. In particular, the managers had the flexibility to invest up to 35% of the fund’s assets in non-U.S. equities, depending on a bottom-up assessment of the opportunities available. As of the second half of 2016, however, the managers sold all positions in non-U.S. firms, and redeployed capital in existing U.S. stakes.
The decision led to a significant reduction in the number of holdings relative to its historical norm. We think this change might have meaningful implications in terms of risk/reward profile, leading to a relatively more unpredictable pattern. This strategy's cautious tilt has generally kept it in better shape than the competition during downturns.
That said, longer-term results relative to both the Morningstar Category average and the Russell 1000 Value Index have been mixed at best, on a risk-adjusted basis. We also note that the fund's ongoing charges represent a drag relative to its peers. With increased concentration and lack of leeway to allocate money outside the U.S., we think investors should exercise caution. As a result, we assigned a Neutral rating.
JP Morgan US – Neutral
Fatima Khizou
This fund is co-managed by Dennis Ruhl, Jason Alonzo and Pavel Vaynshtok, who are part of the US Behavioural Finance Investment group at JPM. The overall philosophy has been consistent through time but, as with most quantitative models, enhancements have been made: for example the quality factor was introduced in 2012 and more recently in 2016 the team has started to "turn on and off” the momentum factor based on valuation dispersion. With a strong bias to value, these tweaks aimed to add diversification and cushion returns during down periods.
However, the fund has not benefited significantly from these changes and has struggled to keep up with the index over the short, medium and long term and, in our view, this is unlikely to change. We believe there are more compelling offerings in the US equity space and we have therefore downgraded the fund’s Morningstar Analyst Rating of Silver to Neutral.
