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Generation Global's tech edge leads 5 fund upgrades

Emma Rapaport  |  15 Apr 2019Text size  Decrease  Increase  |  
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Morningstar Manager Research analysts published ratings for more than 100 managed funds in the first quarter of 2019. That tally included 5 upgrades and 3 downgrades.

Below are some highlights from the quarter ratings activity.

Recently upgraded

Upgrades funds morningstar

Recently downgraded

Fund downgrades morningstar

Global equity funds

Generation Wholesale Global Share – upgraded from Bronze to Silver

Generation Global Share’s distinguished team and industry-leading process has increased our conviction. The strategy has delivered stellar performance since inception (in 2007). We’ve been impressed at the team’s ability to navigate a range of market situations with aplomb. They showed shrewd stock selection (in 2016) in healthcare names that enabled them to sail through a volatile period for the sector. Calendar year 2017 was a vintage year. The strategy’s technology positioning helped it thump the index and peers. Furthermore, the strategy defended admirably when markets sold-off in late 2018. We remain critical of the pricey fees, which are higher than most peers, but our conviction in Generation is buoyed by the industry-leading team and process. (Analyst, Andrew Miles)

BlackRock Scientific Intl Equity Fund – upgraded from Neutral to Bronze

BlackRock Scientific International Equity benefits from the firm’s enormous scale and we welcome the use of non-traditional data in offering differentiated insights on traditional investment ideas.

A major source of appeal lies in its massive resources available within the Systematic Active Equity team. Over 27 per cent of BlackRock’s 15,000-strong workforce are in technology roles, making talent attraction more aligned to a technology company than a financial services firm. This focus has been building for years but the shift during 2017 to focus on its quant-based strategies is paying off. We think the scale and first-mover advantage of BlackRock, generated ironically by revenue from its passive business, gives BlackRock a clear competitive advantage. Although recent jobs cuts were announced at the firm, we have seen much more stability than in previous years.

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Overall, we see the benefits of BlackRock’s big data approach and the differentiated equity exposures offered by this strategy. (Senior analyst, Simon Scott)

T. Rowe Price Global Equity – upgraded from Bronze to Silver

The top-notch leadership of this strategy and its skilful utilisation of a very strong analyst team has increased our conviction in T. Rowe Price Global Equity. It is now in a top echelon of global equity managers we cover.

Scott Berg is the portfolio manager here and displays remarkable knowledge of both stocks and macroeconomic issues. He is suitably experienced, having 15 years in markets, all of it at T. Rowe Price. Reducing key-person risk is assistant portfolio manager Hari Balkrishna, who joined Berg in 2015 and similarly shows off vast investment insights. But it is their ability to leverage an enormous team of equity analysts globally that really sets them above most teams we cover. The two portfolio managers frequently talk with sector and country analyst heads to build a highly diverse but still very distinctive growth portfolio we like.
It is a portfolio of around 160 stocks, making diversification the key risk-management tool here. This is particularly important and gives us confidence that the deep growth tilt is well managed.

There’s a lot going right here; the portfolio management and research are top draw, while the risk management in constructing this growth portfolio is very clever. T. Rowe Price goes into an elite class in 2019. (Senior Analyst, Matthew Wilkinson)

Australian Equity Funds

Zurich Investments Equity Income – downgraded from Neutral to Negative

On 3 April 2019, Zurich Investments as the Responsible Entity announced that it would be closing its Zurich Equity Income strategy and returning capital to investors effective 1 July 2019. Until then, all applications and redemptions have been suspended. The underlying manager, Denning Pryce, is expected to cease operations in July 2019. We had harboured serious concerns over the longevity of this strategy following a sustained period of heavy outflows, and this has now come to pass. Denning Pryce will continue to manage the portfolio until its closure, seeking to pass on the value of embedded franking credits to unitholders. Investors must now sit tight and wait for this to play out. (Director, Tim Wong)

Alternative Strategy Funds

FirstChoice WS Alternatives – downgraded from Neutral to Negative

Senior investment manager Guneet Rana is the lead portfolio manager of FirstChoice WS Alternatives, with Mercer offering further support. Rana has been evolving the manager lineup, but the strategy is a long-term consideration. In the four years since inception, there have been two terminations and four additions, relatively high given the small number of holdings. The cross-correlation between managers is relatively static, and there is no real process of forecasting alphas and adjusting portfolio weightings based on risk-adjusted forecasts. There does not appear to be a ready bench of replacement managers in case of termination or regime shift in markets. This is partly because of the internal counterparty processes at CFS, but nonetheless it reduces conviction that the strategy can respond to unforeseen changes. This is something we have observed with concern being raised repeatedly on some managers but little being done in practice.

Performance since 2015 has been disappointing, the early years stemming from a large drawdown from long volatility manager Amundi and in 2018 from double-digit losses in Aspect and Dymon Asia.

We feel the reactive nature of allocations and constraints imposed at the parent level, combined with functional rather than value-adding due diligence, lead to a view that the overall offering is below average within this category. (Senior analyst, Simon Scott)

Ironbark LHP Diversified Investments – upgraded from Neutral to Bronze

Strong underlying manager selection, risk monitoring, and operational diligence creates a high-quality strategy in Ironbark LHP Diversified Investments, but the potential for high fees limits our enthusiasm.

LHP has exhibited strong staff tenure, but there has been turnover as the changing market has led to a shift in the required skill set. The integration of the Mesirow fund-of-funds business will be another watchpoint culturally. What investors receive for their 1.2 per cent headline management fee is great value for money, but if the sub managers perform well, then the layering of fees combine to an eye-watering total. Investors must decide whether they are receiving enough alpha for that fee and for monthly liquidity. (Senior analyst, Simon Scott)

Emerging Markets Equity Funds

Robeco Emerging Conservative Equity AUD – upgraded from Bronze to Silver

There is strong merit in Robeco Emerging Conservative's diversified approach to emerging equities, and our confidence in the strategy has increased. This strategy uses an entirely quantitative-based approach, an area where Robeco has extensive experience and has invested heavily in its people. The team that runs this strategy is led by Pim van Vliet, on whose academic work the model is based. He is joined by five other comanagers, who all invest in the strategy, helping to align their interests with those of investors. The team also includes 10 quantitative researchers who work continuously on model refinements. This constant evolution has been critical to the strategy's success and our positive opinion.

The strategy has a predictable return profile, tending to lag during strong bull markets yet outperform during volatile environments. Indeed, it has demonstrated good defensive characteristics by being less volatile and protecting on the downside. Overall, long-term risk-adjusted results have been excellent here as well. The strategy’s merits also include attractive fees, giving it a built-in advantage over most peers. While the strategy’s growing asset base is worth monitoring, Robeco Emerging Conservative is poised to be a long-term outperformer. (Senior analyst, Matthew Wilkinson)

Aberdeen Emerging Opportunities – downgraded from Silver to Bronze

Aberdeen Standard Emerging Opportunities still boasts a solid investment team, but an evolving investment approach appears to be pulling the team out of its comfort zone. As a result, we downgrade our Analyst Rating.

Since the merger of Aberdeen and Standard Life in August 2017, the London team has been relatively stable, but there have been several departures within the Asia-Pacific region, including four investment managers, casting doubt that the team remains best-in-class.

The investment approach has also been evolving, giving us pause. For more than two decades, Aberdeen has applied a patient, bottom-up approach focused on quality and value. Historically, the team preferred to get its Chinese exposure through Hong Kong names, largely because of 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 changing tact was weak, raising concerns that the team is becoming more relaxed on corporate governance and benchmark-aware.

Unfortunately, the fund’s fees are high compared with peers especially considering the strategy’s USD 32.7 billion asset base. Moreover, the integration of legacy Standard Life’s “focus on change” approach - 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, and the long-term track record remains strong. As such, investors here still have reasons to stick with this decent option. (Senior analyst, Matthew Wilkinson)

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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