New Ratings
BBH Lux Core Select – Bronze
Natalia Wolfstetter
Despite the departure of manager Tim Hartch, who had been a comanager of this fund's US-based sibling, BBH Core Select, since October 2005, we draw comfort from the remain team which is deep and experienced. Michael Keller, now this fund's sole manager, has been a listed manager of the fund's USbased sibling for almost a decade and is one of five analysts who have been with the investment team since its founding in 2005.
No changes are planned to the fund's strategy, which has stood out over the years for its discipline and long-term focus. The team looks for profitable cash generators with strong balance sheets, from which Keller builds a concentrated portfolio of 20 to 30 stocks. One downside of this patient approach is that it can lead to stretches of relative underperformance.
This fund has consistently trailed the US large-cap blend Morningstar Category and the S&P 500 benchmark over the past five years, but this has been a market driven by momentum and similar factors to which this fund has limited exposure. Its 10-year risk-adjusted returns, as measured by the US based fund's Sharpe and Sortino ratios, had beaten the category and the benchmark as of 30 June, 2018.
It remains a solid core stock fund providing great downside protection. However, given the higher price tag of BBH Lux Core Select compared with its US version, we award a Morningstar Analyst Rating of Bronze, which is one notch lower than Silver-rated BBH Core Select.
H2O Allegro – Bronze
Matias Möttölä
We have initiated coverage on the H2O Allegro global macro fund with a Morningstar Analyst Rating of Bronze. H2O’s 16-strong team is led by CEO Bruno Crastes and CIO Vincent Chailley, who founded H2O in 2010 after a long career at CAAM , which was later named Amundi. Among several members joining them from Amundi was Loïc Cadiou, who is this fund’s named manager alongside Chailley.
The process is highly discretionary and flexible, and typically leads to a handful of strong views, which are implemented through government bonds, currencies, and credits with cash instruments and derivatives. The fund’s returns since inception are among the best in the category, with the I C share class returning 14.7% since inception to the end of August 2018, but investors should be aware of the fund’s high risks which can lead to sharp drawdowns.
Neuberger Berman Strategic Income – Silver
Irene Ruiz Espejo
We are initiating coverage of Neuberger Berman Strategic Income fund with a Morningstar Analyst Rating of Silver. The fund benefits from a well-resourced team and a structured process, which has delivered a competitive performance for investors. This Ireland-domiciled fund was launched in 2013, but the US version has been running since 2003. At this team-managed fund, David Brown has been a comanager for 10 years and works alongside Brad Tank – fixed-income CIO – Thanos Bardas, and Tom Marthaler.
The team is helped out by one of the industry’s largest research banks, which can credibly cover the diverse asset classes the fund invests in. The investment process is also well thought out and reasonable. The fund combines top-down and bottom-up considerations but has developed a highly systematic approach to both.
Upgrades
Fidelity Asian Special Situations – Silver
Wing Chan
Increased conviction in this fund’s lead manager and his well-codified approach push its Morningstar Analyst Rating to Silver from Bronze. Suranjan Mukherjee has led this fund since July 2012. Overall, he is a talented manager with more than two decades of investment experience, including a period working on distressed debt restructuring projects in Southeast Asia during the 1997-99 Asian financial crisis.
This experience helped shape his bottom-up investment philosophy as he saw first-hand the difficulty in forecasting macroeconomic conditions. Mukherjee applies a well-codified approach, categorising bottom-up ideas into three buckets: restructuring, franchises, and global leaders. Restructuring names have cheap valuations with negative investor sentiment, but the potential to improve returns on capital over time.
Franchises are local market-share gainers in underpenetrated industries with barriers to entry. And global leaders operate in industries with large total addressable markets and possess sustainable competitive advantages. While the allocation between buckets can change, this framework helps the fund avoid stylistic biases, and consistent execution means it has the potential to outperform in different market environments.
Thus far, the fund has delivered, safely outpacing the MSCI AC Asia ex Japan Index and the typical Asia ex-Japan equity Morningstar Category peer. While fees could be lower, this fund’s talented manager and solid process make it poised to be a long-term winner.
Downgrades
Aviva Investors UK Equity – Neutral
Pete Brunt
Aviva Investors UK Equity’s long-standing manager Chris Murphy was replaced by Henry Flockhart on 1 September 2018. Flockhart started his investment career at Standard Life Aberdeen – formerly Standard Life Investments – as an analyst in 2008 and took over the management of SLI UK Equity High Alpha in 2013. He therefore has good experience in UK equities, but he has been a portfolio manager for only five years.
While managing SLI UK Equity High Alpha, Flockhart relied heavily on the UK equity team’s stock ideas, had a fairly strong value tilt, and had significant exposure to small caps. As a result, the investor experience on SLI UK Equity High Alpha was significantly different to that on Aviva Investors UK Equity under Murphy’s stewardship, notably with higher levels of volatility.
We expect Flockhart to take a similar approach on this fund, which will mark a change from how it was run under Murphy. With little evidence of Flockhart's ability to generate alpha, and the uncertainties that come with a new team setup, our conviction in the fund is lowered. The Morningstar Analyst Rating is therefore lowered to Neutral.
