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