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3 funds ready for a comeback

Emma Rapaport  |  02 Aug 2018Text size  Decrease  Increase  |  
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gold silver bronze medals stars rating funds

These managed funds have underperformed in recent years, but could be due for a change in fortune.

Morningstar fund analysts award a gold, silver or bronze rating to funds they believe will outperform their sector peers over the medium- to long-term.

A gold medal indicates the manager research analyst has the highest conviction in the fund.

A fund's star rating indicates how it has performed in recent history compared to the peer group average. If a fund has a five-star rating, it has significantly outperformed its peers. Conversely, a one-star fund has significantly underperformed.

Using the Morningstar's fund screener, which is available to Premium subscribers, we have identified three funds that are highly rated, but performing below par. They have silver medal ratings, but only two stars.

Impressive conviction and knowledge

Silver-rated Pendal Asian Share (4246) – previously BT Wholesale – hit some turbulence over 2016-17, particularly around its Indian exposure, a losing streak that continued in 2017.

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However, Morningstar continues to hold confidence in the strategy and its portfolio manager, Samir Mehta.

"With over 25 years’ experience, Mehta has run the strategy since its inception and impresses with his detailed stock views and willingness to back his own convictions.

"The focus is on finding firms that can deliver sustainable long-term growth, an ability to consistently generate high returns on capital, and resilience during economic downturns," says manager research analyst, Anshula Venkataraman.

She also notes the portfolio has a "structural bias" towards telecommunications, gaming and consumer brands.

Talented team deserves praise

Silver-rated Lazard Emerging Markets Equity (4870) has a strong track record over the long term, but 2017 was a difficult year. Being underweight to highly priced Chinese technology names caused a drag on relative returns.

However, the fund is likely to hold up better than peers when markets are struggling, as was the case in 2008 and 2011, according to Morningstar manager research analyst Andrew Miles. He notes that performance during 2012 and 2013 was particularly strong, with the over-weightings to Brazilian companies boosting returns.

Overall, Morningstar believes the fund deserves high praise for its stable team of talented staff, and time-tested process. Miles highlights the insights of portfolio manager James Donald and his team as a key advantage of the strategy.

The fund focuses on firms with improving financial productivity, and which haven't been widely recognised by the market, Miles says. After an initial screening process, Lazard's analysts conduct detailed research to understand the profitability drivers. They pay attention to cash flow and its impact on the balance sheet, and consequently shareholder value.

Top-down risks are also considered, including macroeconomic, political, and ESG.

"These are factored in to the intrinsic value, increasing the margin of safety. All up, Lazard is an excellent choice for the long-term investor," says Miles.

Experience, expertise and cohesion

Calendar year 2017 was also a challenging one for silver-rated Robeco Global Equities (40752), when market sentiment shifted in favour of high-momentum and high-growth stocks. As the year unfolded, Robeco's slight value tilt became a headwind.

However, the fund has strong investment merit and several very appealing characteristics, including a skilled portfolio manager, according to Morningstar manager research analyst Ross MacMillan.

Led by well-respected Christopher Hart since July 2008, MacMillan says he is "ably supported by Joshua Jones, who became comanager in 2014, having been part of the dedicated global generalist analyst team since 2008".

"We think this team boasts experience, expertise, cohesion, and stability," says MacMillan. He believes the team's combination of quantitative screens and in-depth fundamental bottom-up research is a sensible approach to stock selection.

The portfolio traditionally contains a tilt to mid-caps with an overweighting to technology, financial, and industrial stocks and underweighting to higher yielding sectors including utilities, consumer staples, and REITs.

 

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Emma Rapaport is a reporter for Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. Email Morningstar's editorial team at editorialAU@morningstar.com

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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