Ratings
iShares China Large Cap ETF USD Dist – Neutral
Monika Dutt
With an ongoing charge of 0.74%, this iShares ETF is one of the most expensive China equity passive funds in its category. Also, it is not well diversified at the sector and stock level. The FTSE China 50 benchmark is heavily tilted toward the financial sector, accounting for approximately half of the index's total weighting. Individual constituents are capped, but almost 40% of total portfolio value is routinely taken up by the top five constituents. For these reasons, we have awarded it a Morningstar Analyst Rating of Neutral.
iShares MSCI World EUR Hedged ETF Acc - Silver
Dimitar Boyadzhiev
We have initiated coverage of iShares MSCI World EUR Hedged with a Morningstar Analyst Rating of Silver on the basis that it offers broad, diversified and representative global equity exposure for a fee that is much lower than the average fund in the Global Equity-Currency Hedged Morningstar Category. The strategy has been difficult to beat over time and we have high conviction that it represents a solid investment option for the long-term investor.
L&G Global Emerging Markets Index I Dist - Bronze
Monika Dutt
This fund comes across as a competitively priced, above-average proposition in the category. It tracks an index which is broadly representative of the emerging-markets equity universe. However, since we expect this fund to be more concentrated at the country level in the future, we have limited its Morningstar Analyst Rating to Bronze.
PIMCO GIS US Short-Term – Silver
Mara Dobrescu
This fund's wide-ranging strategy makes full use of the team's global fixed-income expertise, led here by Jerome Schneider. While that approach comes with risk, the fund's skilled manager never loses sight of its modest goals--protecting capital chief among them. The one negative for this otherwise strong choice is the 85-basis-point price tag for the E Acc share class – that’s steep for an ultra-short-term bond fund and disappointing given the large volume of assets managed by PIMCO in this strategy. Given the excellent resources at work here, though, we believe the fund is still a compelling option.
Vontobel Fund - Far East Equity – Bronze
Ronald van Genderen
Although long-time lead portfolio manager Rajiv Jain left in March 2016, we have sufficient conviction in the remaining investment team and the strong bottom-up approach. Brian Bandsma took over at the helm. He was quite familiar with this strategy and team, having joined Vontobel in November 2002 as a senior research analyst, before he got promoted to co-portfolio manager next to Jain on this fund in 2013. He receives strong support from a well-resourced investment team, which remained stable after Jain’s departure and was even strengthened with four additional analysts.
Bandsma has kept the strong bottom-up approach intact. Within Vontobel’s Quality Growth group the focus is on high-quality companies with steady, dependable growth and barriers to entry, and management that has made sound decisions. Under Jain, the fund had a strong risk-adjusted long-term track record. With the same approach and investment team in place, this is still relevant to a substantial extent. We do, however, acknowledge that Bandsma does not have an independent record as lead manager of this fund.
Upgrades
BGF Emerging Markets Bond – Bronze
Niels Faassen
With Sergio Trigo Paz and Michel Aubenas, this fund benefits from a stable core of decision-makers. They apply a proven process, which allows the team to implement high-conviction active positions with a focus on limiting drawdowns. The process combines an awareness of the global environment with in-depth country analysis. The managers are also aware of the potential impact of exogenous global factors on emerging-markets bonds and therefore undertake ongoing scenario analysis through a "Global Weather Station" model to identify potential "storms.” All in all, the team’s effective application of an active yet risk-controlled process makes this a solid offering within its peer group.
iShares MSCI USA Small Cap ETF USD Acc - Silver
Monika Dutt
We have greater conviction that this ETF will continue to outperform its category peers over the long haul, mostly because it tracks an efficient, well-diversified and representative benchmark. Its ongoing charge of 0.43% may be higher than most rival passive offerings, but remains much lower than its active peers, which should continue to give the fund a competitive edge.
XTrackers Stoxx Europe 600 ETF (DR) 1C – Gold
Dimitar Boyadzhiev
This ETF is one of our best picks as a European equity core building block. With a fixed number of 600 stocks, the strategy provides access to over 98% of the European investable market and it has proven a very difficult opponent for the average peer to beat. It is a good representation of the Morningstar Europe Large-Cap Equity Category with a modest orientation towards larger companies. At 0.20%, the fund is one of the cheapest available offerings in Europe.
Downgrades
Franklin European Small-Mid Cap Growth – Neutral
Samuel Meakin
The fund has been managed by Ed Lugo since July 2006. He is the lead portfolio manager of the global small-cap team at Franklin, which comprises six individuals. In addition to this mandate, the team is responsible for global and international (global ex-US) smaller-cap strategies, and the international strategy is home to the majority of the team’s assets. The unconstrained approach can lead to the make-up of the fund differing significantly from the index and peers, and the portfolio is concentrated in 25-35 names. The limited diversification increases the importance of getting individual stock calls correct, but attribution analysis shows that stock selection has been below par for a number of years. The weakness in relative returns has somewhat dented our confidence in the portfolio construction and stock-picking approach employed here, where stock selection is expected to drive performance, and we believe there to be more appealing options available to investors seeking exposure to the European small-cap space.
Investec Global Equity – Neutral
Peter Brunt
This strategy is managed by Investec's 4Factor team, with the oversight of the head of the Core strategy. Up until he stepped back from portfolio management in June 2017, this role was undertaken by James Hand. He was replaced by Rhynhardt Roodt and Jonathan Parker, who now co-head the Core strategy. Both Roodt and Parker have experience in the 4Factor approach but limited global equities experience.
While the approach combines a quantitative model and fundamental research from the team, final stock selection and portfolio construction lies with Roodt and Parker. In an acknowledgement that the Core strategy has been less effective than other 4Factor strategies, they have already made some changes. While we welcome efforts to improve the effectiveness of the strategy, given the new co-managers' limited experience in global equities, we have little visibility as to whether they will be successful. The fund's Morningstar Analyst Rating is therefore lowered to Neutral, while we await the impact of the new co-managers' efforts to improve the effectiveness of the Core strategy.
Under Review
Baillie Gifford Japan Ord (BGFD)
David Holder
Baillie Gifford has announced that after 37 years at the firm, Sarah Whitley, lead portfolio manager of the Morningstar Analyst Gold rated Baillie Gifford Japan Investment Trust, and head of the Japanese Equities team, will be retiring in April 2018. Following her retirement, Matthew Brett will take over as lead portfolio manager of the trust, supported by Praveen Kumar as deputy portfolio manager.
Donald Farquharson will assume Whitley’s responsibilities as head of the Japanese Equities team. Brett joined Baillie Gifford in 2003 and is an Investment Manager in the Japanese Equities team where he comanages the Baillie Gifford Japanese OEIC with Whitley. Kumar joined Baillie Gifford in 2008, is also an Investment Manager in the Japanese Equities team, and portfolio manager of Baillie Gifford Shin Nippon Investment Trust.
Investors can take comfort that Brett has been attending the Baillie Gifford Japan Investment Trust board meetings since 2008, and has worked closely with Whitley for a decade. While there is clearly continuity in the board’s appointment of Brett as lead portfolio manager, the retirement of Whitley will impact the collective experience within the team. In recognition of this changing dynamic, we have moved the Baillie Gifford Japan Investment Trust’s Morningstar Analyst rating to Under Review, pending an update with the management of the company.
