Upgrades
SPDR FTSE UK All Share (FTAL) – Silver
Dimitar Boyadzhiev
This fund tracks a broad and diversified index that has proved a formidable opponent to beat. Its portfolio spans the entire market-cap spectrum, covering more than 600 large-, mid-, and small-cap companies.
Despite that it is not one of the cheapest FTSE All-Share passive offerings, we have a strong conviction on the merits of the benchmark as an investment proposition and the ability of the fund to outperform its average category peers. We have therefore upgraded it to a Morningstar Analyst Rating of Silver.
Downgrades
Aberdeen Emerging Markets Equity – Bronze
Andrew Daniels
While Aberdeen Standard continues to have a solid and experienced investment team in place, an evolving investment approach appears to be pulling the team out of its comfort zone. As a result, the strategy’s Morningstar Analyst Rating has been downgraded to Bronze from Silver. The firm has a large dedicated emerging-markets team of approximately 65, and the key figures here are Devan Kaloo and Joanne Irvine.
Kaloo and Irvine, like many of their colleagues, have spent the majority of their careers at the firm – joining in 2000 and 1996, respectively – and their insights are typically above-average.
While the London team has been relatively stable since the August 2017 merger of Aberdeen and Standard Life, there have been several departures within the Asia-Pacific region, including four investment managers, which casts doubt that the team remains best-in-class.
The investment approach has also been evolving, giving us pause. Historically, the team preferred to get its Chinese exposure through Hong Kong names, largely due to corporate governance and transparency concerns.
However, the team revisited its thinking on many China names in 2017 – amid poor performance – and has since been adding aggressively there. While it is promising to see the team willing to be more flexible, the rationale for the shift in thinking during a series of November 2018 meetings was weak, raising concerns that the team is becoming more relaxed on corporate governance and benchmark-aware, as evidenced by deteriorating active share in the year ended September 2018.
The lower active share places an additional emphasis on this fund’s fees, which are uncompetitive, especially considering the strategy’s $32.7 billion asset base. Moreover, the integration of legacy Standard Life’s “focus on change” approach into a new research note template – rolled out in May 2018—could take the team out of its comfort zone.
Despite lower conviction in the approach and above-average fees, the fund does have an experienced, proven, and well-resourced team to leverage, giving investors reason to hold on.
Lyxor SG Global Quality Income ETF (SGQL) – Negative
Dimitar Boyadzhiev
We have no confidence in the ability of Lyxor SG Global Quality Income ETF to outperform its Morningstar Category peers over the long term. The fund’s high dividend-yield requirement and its permanent exclusion of financial stocks limit its reach and result in an outsize bet toward defensive dividend-yielding sectors, namely utilities, consumer defensive, and communication services.
By doing so, the fund’s long-term risk-adjusted performance is inescapably tied up to the performance of these sectors. Moreover, its restricted number of stocks limits the diversification benefits that give a solid edge to some of its competitors. For all these reasons, we have downgraded this fund’s Morningstar Analyst Rating to Negative.
Moved from Under Review
Standard Life Investments Global Absolute Return Strategies – Neutral
Francesco Paganelli
We have assigned a Morningstar Analyst Rating of Neutral to Standard Life Investments Global Absolute Return Strategies Fund. The fund was previously rated Bronze and had been placed Under Review following news of the impending retirement of lead portfolio manager Guy Stern. The firm has appointed Aymeric Forest to succeed Stern as head of the multi-asset team.
Forest, who previously spent around eight years at Schroders, will join Aberdeen Standard Investments in February 2019. The firm also announced the promotion of three senior investment professionals to the global absolute return portfolio management team, bringing the total to eight. The change creates uncertainty in both the team structure and its ability to efficiently execute GARS’ process over the long term.
As a result, investors should let the dust settle around the transition before considering this fund, although it is worth keeping an eye on given its longer-term successful history.
