New Ratings
Capital Group Japan Equity – Bronze
Peter Brunt
As with all Capital Group funds, this fund follows a multimanager approach that aims to mitigate style-bias and ensure that stock selection is the main driver of returns through all market conditions. The portfolio is split into four sleeves, of which three are managed by longstanding and experienced portfolio managers respectively. They each follow their own investment style and approach, which the group has purposefully selected in order to achieve a portfolio with an optimum blend of styles and market-cap exposure.
The final sleeve is managed as a research portfolio, reflecting the best ideas of the analyst team. The team has a good level of experience and stability but is not dedicated solely to Japanese equities. While the fund does not quite meet the high performance expectations that we have of Capital Group products, we assign it a Morningstar Analyst Rating of Bronze based on its experienced and stable management team and significant analytical resources.
Dimensional Emerging Markets Value – Bronze
Monika Dutt
This fund takes more risk than the average category peer, but its value tilt, cost-efficient construction, and low fee should give it an edge over the long term, supporting its Morningstar Analyst Rating of Bronze.
Dimensional Global Small Companies – Silver
Dimitar Boyadzhiev
This fund offers comprehensive access to small and micro-cap companies listed across the global developed market. The portfolio tilts toward smaller, cheaper, and more-profitable companies that should outperform, according to academic research. Additionally, it charges a competitive fee. With these attributes, we can expect the fund to continue delivering superior risk-adjusted returns.
Fidelity Global Property – Neutral
Ronald van Genderen
This fund has some characteristics that we like, but with lead-portfolio manager Dirk Philippa being at the helm only for a short time and with an elevated turnover within the 10-strong Global Real Estate Securities research team in 2016, it is too early to gain high conviction. Philippa is experienced in property equities and has spent most of his career covering both European and Global property equities as an analyst, but this is his first role as a portfolio manager.
Over his tenure, the risk-adjusted track record has been above average compared with the Morningstar Property – Indirect Global category and the FTSE EPRA/NAREIT Developed index. However, it is still relatively short and rests largely on a very strong 2014. Finally, the fund is a bit more expensive than peers.
Lyxor PEA Russia DJ Russia GDR ETF – Negative
Monika Dutt
We have conviction that these ETFs will continue underperforming their category peers over the long term. The funds provide exposure to the Russian equity market through London-listed global depositary receipts. Consisting of only 12 stocks, the Dow Jones Russia GDR Index is a highly concentrated index at the sector and security level. The top three holdings represent over 50% of the index, while oil and energy make up over half of total portfolio sector composition. While the funds are cheaper relative to active funds, we believe that active managers can add value in the Russia equity category by offering exposure to higher quality and more diversified portfolios.
Upgrades
River & Mercantile UK Equity Smaller Companies – Silver
Samuel Meakin
Fund manager Philip Rodrigs is well known to us from his successful spell as manager of Investec UK Smaller Companies. He joined River & Mercantile in 2014 to assume the lead manager role on this fund. We have high regard for his stock-picking ability and the value added by his qualitative input over and above the quantitative screening tool, within an overall process that is similar to the one he employed with great success at Investec. While we acknowledge that he has a high workload, given he manages two other strategies, our concern here has been alleviated over time by his consistent demonstration of a depth and thoroughness of research and analysis of the stock within his remits.
Vanguard Global Small-Cap Index – Silver
Dimitar Boyadzhiev
This fund is one of our preferred options in a category where active managers seem to have a hard time adding value, despite what one would think based on market efficiency arguments. The fund tracks a broadly representative benchmark and is low cost. Liquidity --often an issue in the small-cap space-- is efficiently managed, and Vanguard’s portfolio management team delivers tight tracking. For these reasons, we have upgraded this fund to a Morningstar Analyst Rating of Silver.
Downgrades
iShares DivDAX® (DE) – Negative
Dimitar Boyadzhiev
We do not believe in this fund’s potential to outperform its category peers over the long term. With a fixed number of 15 stocks, its portfolio is concentrated and exposes the investor to a high degree of idiosyncratic risk. Moreover, the ETF lacks dividend sustainability screening and does not attempt to remove companies with deteriorating fundamentals, which increases the potential of losses from dividend cuts. It also has higher turnover compared with other market capitalisation-weighted dividend ETFs. With all that said, we downgrade this fund's Morningstar Analyst Rating to Negative.
Henderson European Focus – Bronze
Henderson European Focus Trust (HEFT) – Bronze
Henderson European Selected Opportunities – Bronze
Henderson Gartmore Continental European – Bronze
Janus Henderson's London-based European equities team has seen the departure of three of its members, all of whom had meaningful input into this strategy. While we take comfort that the experienced John Bennett remains responsible for the strategy, and that he has cancelled all marketing for new clients and intends to replace the lost resource, we note that this in itself can be time-consuming, and also brings an element of uncertainty with regards new team dynamics. The Morningstar Analyst Rating is therefore lowered one notch to Bronze, reflecting our reduced level of confidence in the strategy’s ability to outperform over the long term.
Ratings moved to Under Review
Worldwide Healthcare (WWH)
David Holder
It has been announced that, with immediate effect, Samuel D. Isaly will be stepping down from his portfolio management responsibilities at Worldwide Healthcare Trust, the Board of the trust and from OrbiMed Capital LLC which he founded in 1998. Isaly managed the fund alongside Sven H. Borho and Dr Trevor Polischuk, and this duo will lead on portfolio management responsibilities from hereon. Borho was named on the trust in a management capacity in February 2013 and is a founding partner of OrbiMed with 26 years’ industry experience.
Polischuk has been a named managed on the trust since March 2015 and is a public equity partner focused on the global pharmaceutical industry, having previously worked at Lehman Brothers as a senior research analyst covering the U.S. pharmaceutical sector. Isaly, who is 72, had been responsible for managing the trust’s assets since inception in 1995 and, as such, his departure is a material event.
Given these developments we are moving the Morningstar Analyst Rating to Under Review, pending a meeting with Borho and Polischuk to understand the effects of the changing dynamics here.
