New Ratings
Vanguard SRI Global Stock – Bronze
Dimitar Boyadzhiev
The fund represents a sensible way for socially conscious investors to get broad and diversified exposure to stocks from the global developed markets. The fund tracks the FTSE Developed World Index while excluding companies engaged in activities that result in serious violations of the United Nations Global Compact initiative or that are involved in the production of controversial weapons. The FTSE Developed World is one of our favourite options for gaining access to the European stock market.
The fund has tracked its benchmark relatively well despite the exclusion of large index constituents, such as HSBC and United Technologies, which might prove difficult to substitute. The ongoing charge of 0.35% is significantly lower than the category median, increasing our confidence that this fund will outperform the average peer. However, there are far cheaper offerings in the category. On the basis of this, we awarded this fund a Morningstar Analyst Rating of Bronze.
Vanguard SRI Europe Stock – Silver
Dimitar Boyadzhiev
The fund represents a sensible way for socially conscious investors to get broad and diversified exposure to European equities. The fund tracks the FTSE Developed Europe Index while excluding companies engaged in activities that result in serious violations of the United Nations Global Compact initiative or that are involved in the production of controversial weapons. The FTSE Developed Europe is one of our favourite options for gaining access to the European stock market.
The fund has tracked its benchmark relatively well despite the exclusion of large index constituents, such as HSBC, which might prove difficult to substitute. The ongoing charge of 0.30% is significantly lower than the category median, increasing our confidence that this fund will outperform the average peer. However, there are far cheaper offerings in the category. On the basis of this, we awarded this fund a Morningstar Analyst Rating of Silver.
Upgrades
BlackRock Corporate Bond – Silver
Ashis Dash
Manager Ben Edwards brings relevant sterling credit expertise. He took over as lead manager of the fund in June 2015, having previously managed its credit allocation in 2011 and then comanaged it with Simon Blundell from May 2012. He employs a flexible but risk-aware process that has led to impressive results over his tenure, with the fund benefiting from contributions across a range of positions. The combination of a solid manager and a well-implemented process, backed by BlackRock’s well-established fixed-income platform, makes this fund stand out within its Morningstar Category. We are therefore upgrading its Morningstar Analyst Rating to Silver.
BlackRock UK Special Situations – Bronze
Simon Dorricott
Our confidence in the partnership between Luke Chappell and Roland Arnold has increased over time. The two have managed BlackRock UK Special Situations since September 2015 and appear to work well together, something that is important on this fund, which is more than simply an amalgamation of a large-cap and a small-cap portfolio. The managers seek the best opportunities from across the market-cap scale, drawing on input from their colleagues on the UK desk. They employ a quality-growth approach and have produced good returns so far. Our increased conviction is reflected in the fund’s Morningstar Analyst Rating moving to Bronze from Neutral.
Downgrades
Schroder ISF US Small & Mid Cap Equity – Bronze
Schroder ISF US Smaller Companies – Bronze
Lena Tsymbaluk
The funds continue to benefit from a seasoned investor, Jenny Jones, who has been in charge of this strategy since December 2004. In January 2018, Robert Kaynor was appointed comanager alongside Jones as part of their long-term succession planning.
Kaynor has over 20 years of investment experience and has been part of the team for five years as director of research. While there is some uncertainty in terms of how much influence Kaynor is going to have on portfolios as comanager, it is unlikely there will be a wholesale change.
We also draw comfort from Jones still being actively involved with the strategy, and our qualitative assessment doesn’t currently raise any red flags. However, the funds’ fees are high and represent a structural disadvantage compared with peers. We therefore downgrade the fund’s Morningstar Analyst Rating to Bronze.
Oppenheimer Global Equity UCITs – Neutral
Natalia Wolfstetter
On April 16, 2018, Oppenheimer announced that lead manager Rajeev Bhaman, who has managed the underlying strategy since 2004, plans to retire next March. At that time current comanager John Delano will become the fund's sole manager. Delano has been a comanager for just over a year, though he had been an analyst on the fund since October 2010. Delano says he will retain this strategy when he takes over, and with his experience on the fund and its very low turnover approach, it's likely that little will change for some time after Bhaman departs.
But Bhaman's wide knowledge base and decades of experience as decision-maker will be gone, and that will be tough to replace. Therefore, it's hard to be confident the fund will continue to be a long-term outperformer after the transition, resulting in a downgrade of the fund’s Morningstar Analyst Rating to Neutral from Silver.
AXA Framlington UK Select Opportunities – Neutral
Simon Dorricott
Nigel Thomas, the long-standing manager of AXA Framlington UK Select Opportunities, is to step down on December 31, 2018, and pass responsibility to Chris St. John. St. John is an experienced investor, but he has primarily focused on small- and mid-cap stocks in the past.
He has managed a mandate that’s similar to UK Select Opportunities for the past two years, and the two funds show consistent sector and style biases, but they have significant differences at the stock level, which reflects the freedom that managers have at AXA.
Given St. John’s relatively limited experience with this type of mandate and the significantly increased assets under management he will have to manage in future, we feel the fund merits a Morningstar Analyst Rating of Neutral at this time. It held a Silver Rating prior to being placed under review on the announcement of the manager change.
Schroder European Equity Absolute Return – Neutral
Fatima Khizou
Steve Cordell, who had managed this fund since 2014, has decided to leave the industry. Nicholas Kissack and Bill Casey, who joined Schroders in February 2018 to replace lead manager Philip Matthews as comanagers on the UK Alpha Plus fund, a long-only product, took the helm here at the end of May 2018. They joined the group from Janus Henderson, where they formed part of John Bennett’s Pan European analyst bench and were dedicated to the long-only strategies.
The pair is making wholesale changes to the fund’s investment process, which will revolve around three pillars: fundamental, thematic, and quantitative, with the aim for idiosyncratic stock risk to be the main driver of positive absolute returns.
Additionally, the portfolio will be managed against new risk limits, which aim for greater flexibility and market directionality. While the proposed changes are sound, the investment process has not been tested previously and there are uncertainties around its implementation by the new unit. In fact, Casey and Kissack don’t have track records of managing funds together or separately. The fund therefore earns a Morningstar Analyst Rating of Neutral.
Schroder ISF European Equity Absolute Return – Neutral
Fatima Khizou
Steve Cordell, who had managed Schroder ISF European Equity Absolute Return since 2014, was replaced by Nicholette MacDonald-Brown and Stephen Shields at the end of May 2018. MacDonald-Brown joined Schroders in 2011 from Goldman Sachs and began her tenure on Schroder ISF European Market Neutral in 2012. She has been supported by comanager Shields on that fund since March 2018.
The new management duo will follow the same investment process used to manage Schroder ISF European Market Neutral. Specifically, the fund will follow a purely bottom-up approach to identify mispriced investment opportunities and will aim for idiosyncratic stock risk to be the main driver of positive absolute returns.
The portfolio will also be managed against new risk limits, which will result in a slightly more levered portfolio than under Cordell’s watch in recent years. While the investment approach has been tested, its implementation by MacDonald-Brown has led to mixed results and an overall average outcome.
Moreover, we think that it will take time for the two managers to settle into the new structure given that Shields was only recently named comanager; he previously held an analyst role within the group. The fund therefore earns a Morningstar Analyst Rating of Neutral.
Moved to Under Review
M&G Global Emerging Markets Fund
Simon Dorricott
M&G has announced that the manager of this fund, Matthew Vaight, is to leave the group and the industry at the end of 2018. Vaight was a comanager on this fund at its launch in 2009 and became lead manager in 2012. Since then, he has been the key decision-maker.
Support has been provided by a team of five analysts and managers, including Michael Bourke, who joined the team in 2015. Bourke will be taking over as lead manager here and in the interim will be working alongside Vaight on this strategy.
He already manages the equity sleeve and allocation between bonds and equities for the M&G Emerging Markets Income Opportunities fund, which launched in May 2017. He has a good level of experience, having covered emerging markets for over 13 years.
It is the stated intention that the investment process will remain in place following the change in manager, but, given the forthcoming change in lead decision-maker and Bourke's slight bias towards macro views in comparison to Vaight, we are placing the fund's Morningstar Analyst Rating Under Review pending a meeting to fully understand the new manager's investment style.
M&G Asian Fund
Simon Dorricott
Matthew Vaight was a comanager on this fund from 2008 and became lead manager in 2012. Since then, he has been the key decision-maker.
Support has been provided by a team of five analysts and managers, including Alastair Bruce, who joined the emerging-markets team in 2015 and M&G in 2011 as a graduate trainee. Bruce will be taking over as lead manager here and in the interim will be working alongside Vaight on this strategy.
It is the stated intention that the investment process will remain in place following the change in manager, but, given the forthcoming change in lead decision-maker and Bruce's more limited experience, we are placing the fund's Morningstar Analyst Rating Under Review pending a meeting to fully understand the new manager's investment style and credentials.
