New Ratings
Guardcap Global Equity - Silver
Jeffrey Schumacher
GuardCap Global Equity's talented and cohesive team combined with an impressively rigorous bottomup process give this fund an edge. We initiate coverage with a Morningstar Analyst Rating of Silver for its clean I-share class. Ratings for other share classes range from Gold to Bronze. The fund is led Michael Boyd and Giles Warren, two veteran quality-growth investors who run the fund since its 2014 inception and ran a similar strategy since 1996 at their previous employer. They are supported by two dedicated analysts, which makes it a compact team with high key-person risk, however, their dedication, deep knowledge, and collaborative approach set them apart. Another strength of this fund is its wellstructured, intensive, and thorough bottom-up research process. The philosophy adheres to strict quality and growth criteria but is also mindful of valuations. Only a small number of companies are meticulously and patiently analysed. The intensity of research increases as a company progresses through the various stages of the process. The research is documented in detailed reports, which are heavily debated and challenged, even after a stock enters the portfolio. The portfolio consists of 20 to 25 stocks, which puts the managers' highest convictions on full display. This fund's track record is relatively short, but it's quite convincing as it has done an outstanding job managing downside risks.
Upgrades
BGF World Financials - Bronze from Neutral
Samuel Meakin
BGF World Financials' experienced manager, backed by a good level of analytical resource, and a clearly defined process mean that there are several positives here. The continued consistent implementation of the approach has increased our level of conviction. We have upgraded the strategy’s clean D2 share class to a Morningstar Analyst Rating of Bronze from Neutral. Other cheaper share classes also earn a Bronze rating, while more expensive classes are rated Neutral.
Downgrades
Edinburgh Investment Trust - Neutral from Silver
Peter Brunt
The increasing number and nature of stock-selection issues over a prolonged period have raised concerns about the manager's implementation of the investment approach. Further, within our new ratings framework, which places a greater focus on overall costs, the interest charges on the trust's debt facilities make it a less competitive offering. As a result, the Morningstar Analyst Rating is lowered to Neutral from Silver.
Fidelity US High Yield - Bronze from Silver
Bhavik Parekh
Despite changes to the high-yield team the experienced Harley Lank remains as lead manager on this strategy. Alex Karam, who has a background in distressed credit, was named co-manager in October 2019 and is also manager on Bronze-rated, US-mutual Fidelity Advisor High Income. Our conviction in the team and process has not changed. However, under our enhanced ratings framework, which places a greater focus on fees and benchmark-relative performance, the Morningstar Analyst Rating for the fund’s clean Y share class is lowered to Bronze from Silver. The ratings for other share classes range from Bronze to Neutral
Franklin US Low Duration - Neutral from Bronze
Garrett Heine
The new fixed-income CIO, Sonal Desai, has made some recent changes to Franklin US Low Duration’s management team. She became a named manager here and provides macro views to its day-to-day managers. Desai is focused on creating a team-based approach and increasing the utilization of data science and quantitative capabilities. The core process remains intact despite the personnel changes. Under our enhanced ratings framework, which places a greater focus on fees and benchmark-relative performance, the Morningstar Analyst Rating for the fund’s clean share class is lowered to Neutral from Bronze. The more expensive share classes earn a Negative Rating.
Invesco UK Strategic Income - Neutral from Bronze
Peter Brunt
While the strategy's manager is very experienced, the increasing number and nature of stock-selection issues over a prolonged period have raised concerns about his implementation of the investment approach. We also have concerns over the level of analytical support, given the significant exposure to small- and micro-cap names. As a result, the Morningstar Analyst Rating for the strategy's clean Z Acc share class is lowered to Neutral. Ratings on other share classes range from Neutral to Negative.
Invesco Income and Invesco High Income - Neutral from Bronze
Peter Brunt
Over the years, Mark Barnett has found more of his stock ideas among mid- and small caps than the benchmark and peers have. Exposure to small caps and micro-caps started to increase in 2017 and reached a sizable overweight, collectively accounting for over 30% of the portfolio, compared with the benchmark's 8%, by the end of September 2019. This was expected to some extent, as Barnett's more positive view on the UK economy resulted in a move into more domestically facing stocks, which are typically smaller companies. The fund has also seen an increase in more early stage, less proven companies, where cash flow sustainability is less certain. Such a shift in market-cap profile for a strategy with sizable assets has made the overall liquidity profile less attractive and has resulted in significant ownership of many smaller names. While the group has been able to meet redemptions so far, Barnett's continued intent on investing in smaller names gives us cause for concern.
The increased focus on domestic stocks has proved a headwind, as the market has shunned them over Brexit uncertainty, but this does not explain the extent of the underperformance over a prolonged period: The strategy has suffered from a high number of stock-specific problems. While contrarian investing often involves an element of risk, the nature of some of the issues, including among small caps and micro-caps, has raised concerns over Barnett's implementation of the approach. We also have concerns over the level of analytical support given the significant exposure to small- and micro-cap names. As a result, the Morningstar Analyst Rating for the strategy's clean Z Acc share class is lowered to Neutral. Ratings on other share classes range from Neutral to Negative.
M&G Recovery - Neutral from Bronze
Fatima Khizou
While M&G Recovery continues to benefit from a long-tenured manager, concerns over implementation and a weakened supporting cast have lowered our overall conviction. As a result, the Morningstar Analyst Rating for the I Acc share class is downgraded to Neutral from Bronze. All other share classes are also now rated Neutral.
Robeco Emerging Markets Equities - Bronze from Silver
Mathieu Caquineau
Under our enhanced ratings framework, which places a greater focus on fees and benchmark-relative performance, the Morningstar Analyst Rating for the fund’s clean share F class is lowered to Bronze from Silver. Ratings on other share classes that charge higher fees earn a Neutral rating.
Schroder ISF Global Smaller Companies - Neutral from Bronze
Fatima Khizou
Continued personnel turnover resulting in overall reduced team experience, combined with mixed results from its underlying regional teams in recent years, raises doubts about this strategy’s ability to outperform in the long haul. As a result, the Morningstar Analyst Rating for the C Acc USD share class is downgraded to Neutral from Bronze. The lowest-cost share class remains rated at Bronze, while all other share classes are rated Neutral.
Schroder ISF Hong Kong Equity - Bronze from Silver
Germaine Share
We remain confident in the portfolio manager Toby Hudson and the proven investment process. Under our enhanced ratings framework, which places a greater focus on fees and benchmark-relative performance, the Morningstar Analyst Rating for the fund’s clean C share class is lowered to Bronze from Silver. Cheaper share classes are rated Silver and Gold.
Veritas Global Equity Income - Silver from Gold
Jeffrey Schumacher
Lead manager Charles Richardson is stepping down from portfolio management per January 2020, which means the fund loses an experienced skipper. Ian Clark, who joined the firm as a roving analyst in 2018, will succeed Richardson. Although Clark has valuable experience as an analyst, he does not have a proven track record as a fund manager. Yet, we believe that with the support of Andrew Headley and the dedicated and seasoned team of analysts this fund is still in capable hands. The fund’s process won’t change under Clark, but he might make some modifications by selling out of lower quality stocks or reducing the fund’s concentration in Asia and real estate. While these changes to the management team were expected, a reassessment of the personnel setup has led to a lower level of conviction in our view on People. This has prompted a downgrade in the Morningstar Analyst Rating for the clean A GBP share class to Silver from Gold. All other share classes are rated Silver.
Veritas Global Focus - Silver from Gold
Jeffrey Schumacher
Under our enhanced ratings framework, which places a greater focus on fees and benchmark-relative performance, the Morningstar Analyst Rating for the fund’s clean A GBP share class is lowered to Silver from Gold. Share classes with lower fees earn a Gold rating, while others are rated Silver.
Note: Under the enhanced Morningstar Analyst Rating different share classes of funds may have different ratings
