Upgrades
BSF European Absolute Return D – Bronze from Neutral
BlackRock European Absolute Alpha D Acc – Silver from Bronze
We have increased our conviction in the management team and process of this strategy. This team has seen several changes and reorganisations in recent years, including the departure of comanager David Tovey in April 2021. But several positive developments have led us to form a more positive view on the group. The strategy adopts a stock-specific approach to market-neutral investing that plays to the team’s strength. We have built confidence in the way comanagers Stephanie Bothwell and Stefan Gries execute their view. They are supported well by the broader European team and BlackRock’s investment infrastructure. The strategy’s fee structure continues to detract from its appeal, but as a result of the upgrade of the strategy’s People and Process Pillar ratings to Above Average, the fund’s cheaper share classes, including clean D share classes, earn a Morningstar Analyst Rating of Bronze, with pricier shares rated Neutral.
Francesco Paganelli, CFA
Downgrades
Veritas Global Equity Income – Bronze from Silver
While Veritas Global Equity Income continues to have merit, some growing concerns have reduced our conviction in this fund’s resources, leading to a downgrade of the People Pillar score to Average from Above Average. This caused the Morningstar Analyst Rating for the fund’s clean C share classes to drop one notch from Silver to Bronze. Lead manager Ian Clark’s strong analytical skills, passion for dividend investing and dedication to this strategy can give the fund an edge, but the strategy’s dependency on him as primary source of income stock ideas and the greater focus of the global analyst team on the firm’s flagship fund Veritas Global Focus - run with a different approach - make us less comfortable.
Clark has been the driving force behind a major overhaul of the portfolio, as not all the stocks he inherited met his investment criteria and higher bar for quality. The transition process is still ongoing and has been time consuming and slow as Clark does much of the heavy lifting himself. He has been exploring opportunities in industries he’s less familiar with, and requires a high level of conviction before making an investment decision, which in our view has limited the progress made over the past three years. As a result, there are still positions in his portfolio he would rather sell. Another concern is that while Clark can tap into the knowledge and ideas of a seasoned global analyst team of nine, their coverage often doesn’t align well with the companies he can invest in. While Clark has been disciplined and made sensible changes to the portfolio, we were surprised by his decision to buy non-dividend paying stock Meta in 2022. This is not consistent with the core principles of this strategy and raises some concerns about his workload and ability to leverage the broader team to find income ideas.
Jeffrey Schumacher
Veritas Global Real Return – Silver from Gold
Veritas Global Real Return’s strengths stem from a high-quality team and proven process as well as reasonable fees. This long-short equity strategy remains a compelling option in its category, but in contrast with the long-only sibling Veritas Global Focus, the process applied here is slightly more complex to execute. The hedging book acts as a countercyclical buffer and consists of a basket of short index futures. It is scaled up and down mechanically, based on bottom-up valuations across its curated universe list, which is used as a proxy for the broader market. While the approach is distinctive and repeatable, the team’s stringent quality criteria also skew the target universe significantly, both in terms of sectors and style.
This can reduce the suitability of the curated universe to serve as a proxy for broader market valuations on which the hedging decisions are based. Management can tweak the hedge composition to manage the resulting basis risk, with top-down views being part of the equation. That may result in potentially larger factor bets – while the team’s core competence is bottom-up stock- picking, in our view. As a result, the strategy’s Process Pillar rating is downgraded one notch to Above Average from High—relative to a High Process rating on the long-only fund Veritas Global Focus – which leads to a Morningstar Analyst Rating of Silver across the fund’s share classes.
Francesco Paganelli, CFA
