Upgrades
Dimensional UK Core Equity – Gold
Dimitar Boyadzhiev
The low-cost Dimensional UK Core Equity offers comprehensive exposure to UK stocks. The fund overweights stocks with lower valuations, smaller market capitalisations, and higher profitability based on research showing that stocks with those characteristics have tended to outperform over the long term. As a result, it achieves good balance between a smaller-company tilt and quality characteristics. We expect the fund to continue producing superior risk-adjusted returns relative to peers and have upgraded its Morningstar Analyst Rating to Gold from Silver.
Invesco Balanced Risk 8 UK – Bronze
Matias Möttölä
We have upgraded the clean NoTrail share class of the Invesco Balanced Risk 8 UK fund to Bronze from Neutral, while some cheaper share classes of the fund receive a Silver rating. Our upgrade results in large part from our increased conviction in the fund’s process, which has been upgraded to Above Average. The basis of the process is parity of risk between equities, bonds, and commodities. However, the experienced team, led by Scott Wolle, has leeway to make tactical calls, and these have added value in each calendar year since the strategy’s inception in 2008 (this fund was launched in 2012). In 2019 this UK fund has also introduced over- and underweightings between individual commodities through derivatives, instead of using a mere commodity index.
Schroder ISF Asian Equity Yield – Gold
Samuel Lo
The Schroder ISF Asian Equity Yield strategy has been led by best-in-class lead manager King Fuei Lee since its June 2004 inception. Lee, who has 20 years of investment experience, has consistently impressed us over the years with his insights on his holdings and on portfolio construction. Inspiring further confidence is the fact that Lee gets solid support from top-notch comanager Robin Parbrook as well as the broader Asia Pacific ex-Japan investment team, one of our favourites in the region. Reflecting our increased conviction in Lee, the strategy’s People rating has been upgraded to High from Above Average. This, coupled with a robust and differentiated approach that already merits a High Process rating, drove the Morningstar Analyst Rating to Gold from Silver for the strategy’s cheaper share classes, including the C Acc USD clean share class, while the more expensive share classes land at Silver.
Downgrades
JPM US Select Equity – Bronze
Jeffrey Schumacher
The fund benefits from a strong manager, but a change in the implementation of its process and uneven stock-picking by the analysts warrant a downgrade of its cheapest share classes’ Morningstar Analyst Rating to Bronze from Silver. The strategy’s most-expensive share classes earn a Neutral rating. In April 2019, the fund’s implementation of the process changed, as the multisleeve approach was abandoned, giving lead manager Scott Davis full responsibility for the strategy.
The research process remains unchanged, but the portfolio now fully reflects Davis' highest convictions and has become more concentrated, with the number of holdings falling to 65 as of November 2019 from 147 at the end of April 2019. Davis's sleeve has been the best-performing sleeve in the previous team, which is encouraging. Yet he still leverages on the research and ideas generated by the analyst team, whose stock-picking has been uneven over the past five years. Although this indicates that Davis’ performance was driven by his strong execution and stock selection, the repeatability of this success can be questioned as he still leverages on the analyst recommendations that overall have not added value.
On balance, the combination of competitive fees and a more concentrated strategy that reflects the highest convictions of a skilled manager does give us confidence in the strategy’s potential to generate alpha versus the Russell 1000 Index, though its more-expensive share classes are less likely to shine.
M&G (Lux) Global Dividend – Bronze
Jeffrey Schumacher
The fund benefits from the experience and expertise of portfolio manager Stuart Rhodes and a well-defined and sensible investment process. Under our new ratings framework, which places a greater focus on fees and benchmark-relative performance expectations, the Morningstar Analyst Rating for the fund’s clean C EUR Acc share class has been downgraded to Bronze from Silver. Cheaper share classes still earn a Silver rating, while more expensive share classes earn a Neutral rating.
