Fund Research & Insights
4 Underperforming Top Rated Funds

Making money in volatile markets is no mean feat – even the best fund managers struggle against macro headwinds and hot money flows.

But how can investors discern between funds which are down and out, and those suffering a temporary blip? Morningstar analysts are on hand to help.

Morningstar fund analysts base their ratings on five forward-looking qualitative factors; price, performance, investment process, fund manager and parent company.

A Gold, Silver or Bronze analyst rating implies that a fund has the potential to outperform its peers over the long term. A fund’s star rating is backward looking and quantitative – based purely on performance ranked against peers. A one-star rating means it has underperformed the sector average, while a five-star rating means it is a top performer.

Funds Which May be Due a Comeback

The economic backdrop of recent years has played havoc on fund performance; quantitative easing, interest rate shifts and rising debt levels, have all led to some top rated funds underperforming their peers or benchmark over the short term.

Some funds with Gold, Silver or Bronze Ratings by Morningstar analysts also have a one-star performance rating; meaning analysts believe those funds could outperform their peers in the future, despite underperforming in the past.

Using Morningstar Direct, we found one Gold rated fund, one Silver Rated fund and two Bronze Rated funds by Morningstar analysts with a one-star performance rating. Contrarian investors who have conviction in the sectors may want to consider whether now is a good time to get in while the quality funds are going cheap.

Man GLG Japan Core Alpha Equity is a one-star fund with a Gold Rating by Morningstar analysts. It has gained 11.6% year to date, however this return is still behind its Japan large-cap equity category and MSCI Japan index by 0.4% and 0.5%. The fund lagged its peers in three of the past five years but it has a five years annualised return of 11%.

It is the only Gold Rated fund with a one-star rating, and analysts believe this fund will reward long term investors as it combines experienced management with a well-established process.

“Stephen Harker is a seasoned Japanese equity manager. He is backed by two experienced co-managers, Neil Edwards and Jeffrey Atherton,” Morningstar analysts say. “The managers use a rigorous, repeatable process that draws on their extensive knowledge of the Japanese market. They look for companies that appear to be undervalued when compared with rivals; within these, they favour quality companies that are dominant in their sectors and that feature strong management.”

However, investors should be prepared for this fund’s performance that can vary intermittently due to its significant active stock bets and the large-cap value bias, analysts added.

Underperforming Fund Regains Momentum

The one-star Silver Rated Old Mutual UK Alpha Fund lost 2.6% in 2015, underperforming its peers and index. In 2015, the fund performed worse than its UK large-cap blend equity category by 5.1% and its FTSE All Share index by 3.6%. Analysts explained this was because the fund manager Richard Buxton experienced some stock selection issues.

In August 2015 the fund manager Buxton was appointed chief executive officer of Old Mutual Global Investors, of which the role involves additional responsibilities and demands on his time. Analysts have some reservations about its appointment despite they take comfort from the fact that Buxton enjoys strong support from senior investors in the UK team. The fund continues to benefit from Buxton’s experience and his commitment to generating long term outperformance.

This fund has regained some momentum so far this year, up 6%, however it still lags its category and index by 2.4% and 4.5%. It has a 3.7% three year annualised return.

The Bronze Rated M&G Recovery Fund has had a couple of disappointed years. Since the start of the fund’s woes in August 2011 to the end of April 2016, the fund has lagged its UK Flex-Cap Equity Morningstar Category average and the FTSE All Share Index by 8% and 6% on average each year, respectively, Morningstar analyst Simon Dorricott said.

It has gained 9% in the past eight months, performing better than its peers by 3.4%, however it is still behind its index by 1.5%. Looking over a 10 year period, the fund has delivered an average annual return of 4.3%.

“The fund’s continued outflows cause some concern. This concern is compounded by the hefty stakes held in a large number of firms in the portfolio. This combination could inhibit fund manager Tom Dobell’s ability to drive the fund to the same degree of success that he has achieved in the past,” Dorricott said.

Another Bronze Rated fund with a one-star rating is Aberdeen World Equity Income. The fund lost 11.5% in 2015, lagging behind its global equity income category and MSCI world high dividend yield index with double digit percentages. However it has had an excellent 2016 – gaining 26.7%. It surpasses the category by 8.5% and the index by 4.2%.

“Even if near-term performance is lacklustre, the strength of the team and the clarity of the investment process underpinning this fund make it a strong choice for investors seeking income from global equities,” Morningstar fund analyst Muna Abu-Habsa said.

The fund is managed by Aberdeen’s 16-strong global equity team, who have an average 14 years’ investment experience, headed by long-standing manager Stephen Docherty who has been with the firm for over 20 years.

“It is a very settled team that has built up a strong track record across global equity mandates,” Abu-Habsa added.

Source: Morningstar. Karen Kwok | 02/09/2016

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