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Global equity funds: Changes to Morningstar Analyst Ratings

Michael Malseed  |  17 Aug 2021Text size  Decrease  Increase  |  
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We take a medium-to long-term outlook when determining qualitative recommendations. Our views about the merits of investment strategies can shift based on specific factors such as team composition, process changes, and our degree of relative conviction. The implementation of our enhanced Analyst Ratings framework in October 2019 continues to influence ratings changes, given the greater emphasis on the People and Process Pillars and the more explicit consideration of benchmark-relative performance across whole categories and fund fees.

In this review cycle of active managers, we upgraded 12 strategies, downgraded 9, initiated coverage on 11 new strategies, and ceased coverage on 10 strategies.

Upgrades

Aberdeen Std Asian Opportunities Fund

We upgraded Aberdeen Std Asian Opportunities to Bronze from Neutral. While the core tenets of the approach – quality and value – remain intact, there has been a clear effort in recent years to have stock selection—rather than allocation effect — drive the bulk of relative returns. Sector and country bets have been reined in, which puts more of an emphasis on stock selection. The renewed focus enables the team to fully leverage the firm’s deep analytical resources, which we feel should give it an advantage going forward.

Aberdeen Std Emerging Opportunities Fund

We upgraded Aberdeen Std Emerging Opportunities to Bronze from Neutral. While the core tenets of the approach – quality and value – remain intact, there has been a clear effort in recent years to have stock selection—rather than allocation effect — drive the bulk of relative returns. Sector and country bets have been reined in, which puts more of an emphasis on stock selection. The renewed focus enables the team to fully leverage the firm’s deep analytical resources, which we feel should give it an advantage going forward.

Arrowstreet Global Equity

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We upgraded Arrowstreet Global Equity to Silver from Bronze. We are impressed with the rigour of research from the group, and its structure mitigates key-person risk, though personnel turnover is rare. Partnership opportunities have opened up and have been filled across the firm, offering welcome diversity. The firm’s approach, whilst once unique, is becoming more mainstream, and transparency around models and research continues to improve. While it employs classic indicators such as value, momentum, and quality, its real value proposition lies in what it calls "expanded linkages": a search for nonobvious predictive relationships cross countries, industries, and the supply chain.

Arrowstreet Global Equity Hedged

We upgraded Arrowstreet Global Equity Hedged to Silver from Bronze. We are impressed with the rigour of research from the group, and its structure mitigates key-person risk, though personnel turnover is rare. Partnership opportunities have opened up and have been filled across the firm, offering welcome diversity. The firm’s approach, whilst once unique, is becoming more mainstream, and transparency around models and research continues to improve. While it employs classic indicators such as value, momentum, and quality, its real value proposition lies in what it calls "expanded linkages": a search for nonobvious predictive relationships cross countries, industries, and the supply chain.

Bell Global Equities Platform Class

We upgraded Bell Global Equities Platform Class to Silver from Bronze. Bell Global Equities’ broad-cap, quality approach continues to appeal, and our conviction in the cheaper 0.90% per year platform share class has stepped up a notch on a relative basis. Investors should consider this over the relatively expensive 1.46% per year legacy wholesale vehicle.

Dimensional Global Sustainability Trust Hedged

DFA Global Sustainability Trust Hedged was upgraded from Bronze to Silver. The strategy is a solid one-stop currency option for investors seeking exposure to an ESG-tilted, multiple-factor-focused global equity portfolio. For its impressive cost-value proposition, our conviction in the strategy’s ability to deliver long-term alpha has increased. DFA’s approach to environmental, social, and governance factors is systematic and largely data-driven akin to its other factor-based strategies. The strategy evaluates businesses on their environmental impact both on an absolute and industry-relative basis by employing a proprietary sustainability scoring system where carbon emission represents 85% of the total score; the remaining 15% is split across land use, biodiversity, toxic spills, operational waste, and water management.

Dimensional Global Sustainability Trust Unhedged

DFA Global Sustainability Trust Unhedged was upgraded from Bronze to Silver. The strategy is a solid one-stop currency option for investors seeking exposure to an ESG-tilted, multiple-factor-focused global equity portfolio. For its impressive cost-value proposition, our conviction in the strategy’s ability to deliver long-term alpha has increased. DFA’s approach to environmental, social, and governance factors is systematic and largely data-driven akin to its other factor-based strategies. The strategy evaluates businesses on their environmental impact both on an absolute and industry-relative basis by employing a proprietary sustainability scoring system where carbon emission represents 85% of the total score; the remaining 15% is split across land use, biodiversity, toxic spills, operational waste, and water management.

IFP Global Franchise Fund (Hedged)

We upgraded IFP Global Franchise Fund Hedged to Silver from Bronze. IFP Global Franchise (Hedged) is an impressive strategy helmed by best-in-class investors with a strong process focused on franchise quality. The team has proved itself one of the most distinguished and insightful groups under our coverage and continues to deliver for investors. The team focuses on high-performing franchise businesses that are difficult to replicate and that generate strong cash flows.

Magellan Global Equities Currency H ETF

We upgraded Magellan Global Equities Currency Hedged ETF to Gold from Silver. An esteemed portfolio steward and a stringent approach to capital preservation now affords Magellan Global Equities ETF a position at the pinnacle with greater conviction in its listed nature, notwithstanding recent performance woes.

Perpetual Global Share Class A

We upgraded Perpetual Global Share Class A to Silver from Neutral. A change in Perpetual Global Share’s management has lifted our conviction, delivering value-focused global equities underpinned by talented investors and a best-in-class process. Perpetual acquired a 75% interest in US-based global investment manager Barrow Hanley as of December 2020. Commensurately, management of Perpetual Global Share was transitioned from Perpetual’s Garry Laurence to Barrow Hanley during September 2020. The portfolio now resembles the Barrow Hanley Global Value Equity fund and is managed by four comanagers led by Brad Kinkelaar. We view this wholesale change positively, as Barrow Hanley’s team are strong operators with an exceptional process.

T. Rowe Price Global Equity (Hedged)

We upgraded T. Rowe Price Global Equity Hedged to Gold from Silver. Helmed by a standout portfolio manager with an all-encompassing approach, T. Rowe Price Global Equity (Hedged) lands in the top echelon of its peer group. Scott Berg has led this portfolio since 2012 (and a similar vehicle since 2008) and impresses us with his insights. This strategy seeks underappreciated growth potential.

Zurich Investments Unhedged Global Growth

We upgraded Zurich Investments Unhedged Global Growth to Bronze from Neutral. Zurich Investments Global Growth is managed by a stable and senior investment team, and we’ve gained conviction in its straightforward growth investing approach. The approach focuses on identifying companies with accelerating and sustainable growth driven by an inflection in business fundamentals.

Downgrades

Capital Group New Perspective Hedged (AU)

We downgraded Capital Group New Perspective Hedged (AU) to Silver from Gold. While its veteran managers deftly navigate the global investment universe, making it a favoured global equities offering, under Morningstar’s enhanced rating methodology, the hedged share class slips a notch within the equity world currency-hedged Morningstar Category because of its relative ranking in the peer group. 

Dimensional Emerging Markets Trust

We downgraded Dimensional Emerging Markets Trust to Neutral from Bronze. DFA Emerging Markets Trust is an investable strategy that diversifies stock-specific risk, and its process systematically applies moderate tilts to stocks with lower valuations, higher yields, and smaller market caps. However, in making these active bets, the strategy takes on certain risks that may not be adequately compensated. Our conviction in the strategy's ability to outperform its equity emerging-markets Morningstar Category peers going forward has weakened on a relative basis.

Epoch Global Equity Shareholder Yield Hedged

We downgraded Epoch Global Equity Shareholder Yield Hedged to Neutral from Bronze. Epoch Global Equity Shareholder Yield Hedged is an acceptable offering for investors seeking income-oriented global equities with a cash flow focus. Morningstar's enhanced ratings methodology delineates hedged and unhedged classes into discrete categories, and Epoch Global Equity Shareholder Yield Hedged does not quite stack up to the same level within this specific peer group.

Fidelity Global Emerging Markets

We downgraded Fidelity Global Emerging Markets to Neutral from Bronze. The sudden departure of lead portfolio manager Alex Duffy lowers our confidence here. He departs this strategy having managed it since its 2013 launch. The loss of Duffy is disappointing, as he was an investor we rated highly.

Milliman Managed Risk Global Share-Class A

We downgraded Milliman Managed Risk Global Share to Neutral from Bronze. Milliman Managed Risk Global Share offers investors a systematic risk-managed option, but the opportunity cost is too high. The strategy consists of two components: a passive global equities fund benchmarked to the MSCI World ex Australia Index managed by CFS and a risk-management overlay operated by Milliman Financial Risk Management.

Platinum Asia

We downgraded Platinum Asia to Bronze from Gold. The unexpected departure of portfolio manager Joseph Lai at the end of 2020 lowers our confidence in Platinum Asia. Andrew Clifford has taken over 66% of the portfolio as co-portfolio manager, providing some reassurance given his long history of managing the strategy with success prior to 2014.

Platinum Asia ETF

We downgraded Platinum Asia ETF to Bronze from Silver. Platinum Asia ETF PAXX provides listed access to a strategy that was our top pick in this niche space before the unexpected departure of portfolio manager Joseph Lai at the end of 2020 lowered our confidence here. Andrew Clifford has taken over 66% of the portfolio as co-portfolio manager, providing some reassurance given his long history of managing the strategy with success prior to 2014.

Robeco Emerging Conservative Equity AUD

We downgraded Robeco Emerging Conservative Equity to Silver from Gold. Robeco Emerging Conservative Equities' talented team and well-defined, repeatable approach make this an appealing offering, but increasing complexity in the process raises uncertainties, tempering our conviction slightly.

Walter Scott Global Equity

We downgraded Walter Scott Global Equity to Bronze from Silver. Walter Scott Global Equity boasts a deep and impressive investment team whose patient approach has plenty of merit, though we have reduced our overall conviction given its uncompetitive fees relative to peers.

New Coverage

Artisan Global Discovery

We initiated coverage of Artisan Global Discovery with a rating of Bronze. Artisan Global Discovery features an impressive management team with a repeatable approach and solid track record, which gives us confidence in the relatively new offering. Artisan’s growth team seeks to invest in firms that are poised to expand their profits. To do so, the group looks for stocks positively exposed to growth catalysts.

Franklin Global Growth W (Hedged)

We initiated coverage of Franklin Global Growth W (Hedged) with a rating of Silver. We hold it in high regard because of its proven and distinct investment process. Franklin Global Growth W (Hedged) uses an unwavering buy-and-hold approach to gain exposure to sustainable growth companies. The management team seeks high-quality stocks powered by sustainable business models, proven management teams, and strong free cash flow generation.

IFP Global Franchise Fund II

We initiated coverage of IFP Global Franchise II with a rating of Silver. Unlike the original IFP Global Franchise I, this strategy excludes tobacco and weapons from the investable universe. This results in a different portfolio as tobacco has traditionally featured heavily. The managers attempt to replicate the broad-based characteristics of IFP Global Franchise I but may use different stocks, resulting in different performance outcomes, though returns should be largely similar throughout the cycle. The strategy is helmed by best-in-class investors with a strong process focused on franchise quality. The team has proved itself one of the most distinguished and insightful groups under our coverage and continues to deliver for investors.

Impax Sustainable Leaders Fund A

We initiated coverage of Impax Sustainable Leaders with a rating of Bronze. Impax Sustainable Leaders is a worthy consideration for investors seeking an environmentally focused ESG global equities portfolio, given its established and well-thought out-bottom-up process combined with an experienced team. However, investors need to accept a portfolio that differs materially from the equity world large-blend Morningstar Category benchmark and has a strong mid-cap industrials bias, which will influence returns.

Legg Mason Martin Currie Emerging Mkts

We initiated coverage of Legg Mason Martin Currie Emerging Markets with a rating of Bronze. Legg Mason Martin Currie Emerging Markets delivers in the key areas of extensive research and sound portfolio construction from a team with the necessary experience to make this an attractive option.

Legg Mason QS Investors Global Responsible A

We initiated coverage of Legg Mason QS Investors Global Responsible with a rating of Neutral. Legg Mason QS Investors Global Responsible demonstrates areas of unique application, but the team's future focus keeps us cautious. QS Investors has run systematic strategies since 1999, becoming a subsidiary of Legg Mason in 2014 after merging with Legg's existing Batterymarch unit. While intellectual curiosity may keep the team energised, we are wary of the demands within the quantitative unit, as its areas of focus are moving from research to client requirements and ongoing development and rigour around the existing factor library.

Magellan Global Closed Class

We initiated coverage of Magellan Global Closed Class with a rating of Silver. An esteemed portfolio steward and a stringent approach to capital preservation makes Magellan Global Closed Class MGF an attractive listed choice. Upon relaunching from its previous iteration (Magellan Global Trust MGG) on 30 Nov 2020, this listed vehicle’s overarching investment strategy aligns with the approach of the unlisted Magellan Global Open Class fund, an offering we hold in the highest regard. Investors should note that this listed vehicle may trade at a discount or premium to its net tangible assets, or NTA, given its closed-end structure.

Nanuk New World

We initiated coverage of Nanuk New World with a rating of Neutral. Nanuk New World is an investable strategy for those seeking diversified global equities exposure with a sustainability theme, but we have yet to gain conviction in the unique team structure and investment process. The five-strong portfolio management team is led by CIO Tom King, but each manager has a different approach and operates with a large degree of independence. Individual portfolios are combined with risk oversight to form the final 60-70 stock portfolio. Given the workload involved in screening an investable universe of sustainability-themed stocks (around 1,200) and then applying a fundamental bottom-up valuation-disciplined approach, we think the team could use additional resources.

State Street Climate ESG International Equity

We initiated coverage of State Street Climate ESG International Equity with a rating of Bronze. State Street Climate ESG International Equity Fund intelligently combines climate objectives with an improved ESG profile and broad-based index exposure, removing some of the frictions investors face when choosing to be ESG-conscious, warranting our conviction.

Vanguard Active Global Growth

We initiated coverage of Vanguard Active Global Growth with a rating of Silver. Vanguard Active Global Growth offers investors access to a highly regarded offering helmed by talented investors at low cost. Vanguard Active Global Growth is managed by Baillie Gifford and is identical to its Global Alpha strategy.

Zurich Investments Concentrated Global Growth

We initiated coverage of Zurich Investments Concentrated Global Growth with a rating of Bronze. Zurich Investments Global Growth is managed by a stable and senior investment team, and we’ve gained conviction in its straightforward growth investing approach. The approach focuses on identifying companies with accelerating and sustainable growth driven by an inflection in business fundamentals.

Under Review

Fidelity Global Equities

Fidelity announced the resignation of Amit Lodha, lead portfolio manager of the Fidelity Global Equities strategy. Lodha will retain portfolio management responsibilities for the strategy until 30 June 2021 but will stay with Fidelity until September 2021 as a senior advisor to ensure a smooth transition to the new lead manager. From 1 July 2021, Jeremy Podger will act as interim lead portfolio manager. Going forward, the strategy will have a new co-portfolio manager structure. As Lodha’s replacement, Fidelity has hired an experienced lead portfolio manager who is expected to commence in September 2021, as well as appointed Oliver Trimingham as co-portfolio manager. Given the significant change in portfolio management responsibilities, we have placed the Fidelity Global Equities strategy Under Review. A formal review will be undertaken in the coming weeks, and our updated view will be published soon after.

Ceased Coverage

We ceased coverage of the following strategies during the period to allocate analyst resources to other funds.

  • Acadian Wholesale Global Managed Volatility
  • AMP Capital Ethical Leaders International Share
  • Advance International Share Multi-Blend
  • FirstChoice WS Global Share
  • FirstChoice WS Global Share - Hedged
  • MLC Global Share Fund
  • Paradice Global Small Cap Fund
  • Pendal Asian Share
  • Platinum International Brands Fund
  • State Street Global Equity

This article is part of Morningstar's Global Equity Sector Wrap, August 2021. Download the full report.

is a Senior Analyst in the manager research team at Morningstar.

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