New Ratings
PIMCO GIS Income – Silver
Mara Dobrescu
This fund boasts impressive resources under the leadership of Dan Ivascyn (who has been the lead manager of its U.S.-domiciled variant, PIMCO Income, since 2007) and Alfred Murata. It has largely delivered on its income mandate over time, thanks in particular to a significant stake in non-agency mortgages. The team has maintained that stake despite the strategy's torrid growth (they managed $124 billion in the style as of March 2017 including other vehicles), but the non-agency mortgage sector continues to shrink by roughly 10% to 15% per year. That argues for monitoring the fund's growth, although we believe the strategy still has what it takes to outperform its peers.
Ratings Downgrades
JPMorgan UK Smaller Companies – Neutral
JPMorgan Smaller Companies Ord – Neutral
Samuel Meakin
The funds are managed by the experienced and long-tenured Georgina Brittain alongside co-manager Katen Patel, who are members of the European Behavioural Finance Investment Group at JPM. They apply a process that draws upon JPM’s behavioural finance quant model; the aim is to have positive exposure to earnings and price momentum, value, and quality, relative to the market, at the portfolio level. However, this has not always been possible, revealing a potential limitation in the application of the JPM quant process to the UK small-cap universe.
The small-cap team clearly adds qualitative input over and above the quant screening in their assessment of small-cap stocks, but we have not seen conclusive evidence of success from this, with the funds underperforming the UK Small-Cap Equity Morningstar Category average over five and 10 years to the end of April 2017. We therefore believe a Neutral rating is a better reflection of our conviction in the strategy’s merits relative to other offerings in the category.
Allianz Continental European – Bronze
Barbara Claus
The fund had been previously rated Silver and had been placed under review after fund manager Matthias Born announced his upcoming departure in September 2017. After Born’s departure, Thorsten Winkelmann, co-leader of AllianzGI’s European Growth team, will manage the fund together with the former deputy manager Robert Hofmann. Born’s departure will be a loss for the team, but Winkelmann and his colleagues ensure continuity. We express our more-cautious stance by moving the fund’s rating down one notch to Bronze from Silver.
BGF Global SmallCap – Neutral
Muna Abu-Habsa
The fund's rating was Under Review following the departure of its longstanding managers, who were replaced with Blackrock's scientific active equity group. Despite changing hands, the fund boasts a seasoned duo in Raffaele Savi and Kevin Franklin, who have ample experience in quant-led investing and are backed by an extensive team of research and quantitative analysts globally. That said, this is the managers' first foray into a long-only global small-cap strategy and we will be monitoring how they tailor and evolve the quant model to suit the opportunity set. We will therefore let the dust settle before judging the merits of their approach.
Ratings moved to Under Review
Schroder UK Dynamic Smaller Companies
Samuel Meakin
Paul Marriage and John Warren, the managers of Schroder UK Dynamic Smaller Companies, are set to leave Schroders in the fourth quarter of 2017 to set up their own boutique investment business, Tellworth Investments. Schroders intends to announce a replacement management team in due course from within its existing equities business. Marriage and Warren will continue to manage the fund in the interim period and will remain employees of Schroders until they move to Tellworth Investments.
This should help to ensure a smooth transition period with the new management setup, and as such we do not see cause for immediate concern. However, the experience of the managers and the implementation of their investment process were important factors in our positive view of the fund. We will work quickly to assess the situation, but in the meantime and as we await further information, we are placing the fund's Morningstar Analyst Rating Under Review.
