Following the Morningstar OBSR Analyst Ratings Meeting on 11th September 2014, we have changed the Ratings awarded to the following funds:
– BlackRock Global Funds US Basic Value
– Davis Value
We have awarded a new Rating to the following fund
– Polar Capital North American
Click here to read the complete Global Fund Ratings Update
Following the Morningstar OBSR Analyst Ratings Meeting on 14th August 2014, we have changed the Ratings awarded to the following funds…
(Click the link below to access the latest fund ratings report)
http://media.morningstar.com/uk/fund-ratings-update/september.pdf
By Richard Whitehall{#ctl00_ctl00_MainContent_Layout_1MainContent_lnkAuthor}
MIC PREVIEW: Tim Steer will provide a sneak peek into how he grills CEOs when considering an investment in a companyTim Steer won’t buy a stock without meeting company executives.
Tim Steer is manager of the Artemis UK Growth fund and he also runs institutional mandates including the Artemis UK Hedge Fund. He has been at Artemis since mid-2009 having previously managed the UK Alpha fund at New Star. Having first qualified as a chartered accountant he started his investment career as a small-cap analyst for Merrill Lynch and HSBC.
Steer’s Artemis UK Growth fund has a 
Bronze Morningstar OBSR Analyst Rating. In that fund he uses his accountancy background to analyse each company’s accounts in detail, which he believes can reveal much about its current state and offer a guide to its future potential. In particular, he pays significant attention to the finer detail in accounts, concentrating specifically on the use of provisions, cash flow, revenue recognition, debtors and debtor levels. The investment process is wide ranging and also includes a qualitative rating tool.
Within the investment process he emphasises meeting and gaining a thorough knowledge of a company’s management; indeed he won’t buy a stock without meeting executives. In that context it will be interesting to see Steer interview a CEO from a FTSE company at the Morningstar Investment Conference this May. It will provide an insight, both in terms of what information Steer is looking to gain from the CEO, and in terms of how the CEO views the company’s recent performance and the opportunities going forward. It is a rare opportunity to see a fund manager “in action” and should be an informative and entertaining session.
Tim Steer will be one of many UK investment luminaries speaking at the Morningstar Investment Conference in London this May. See the Morningstar corporate site for more information.
Most successful high yield managers tell us that the key to performing well over the long term is to avoid companies that go bankrupt. Of course, at its broadest level this is self-evident for bond investors but in an asset class where a material default rate is to be expected and where the high levels of leverage in companies can mean they unwind very quickly, it is far from easy to achieve in practice. Those managers who can achieve a low level of “adverse credit events”, collecting sustainably high coupons from their holdings while avoiding the periodic illiquidity of the asset class, are therefore those who typically perform strongly.
These characteristics of high yield make it very dependent on a series of idiosyncratic credit risks and I am therefore surprised by the rapid rise of dedicated ETFs in the US. Not only does blind replication clearly remove a key plank of how high yield bond managers add value (hopefully a conscious decision when selecting a pure beta strategy) but by its very nature, it is a very difficult market to replicate by sampling and yet the illiquid nature of many issues means that full index replication is costly. This underlying illiquidity of many bonds is an increasing problem as investment banks continue to withdraw capital from fixed income markets and thus focus more and more on matching buyers and sellers.
Many ETFs, such as the SPDR Barclays Capital High Yield Bond fund attempt to address these concerns by focusing only on the most liquid issues but even here, liquidity is relative and it is noticeable that the NAV of the fund has lagged the benchmark materially over time. Moreover, the focus on larger, liquid issuers is of course an interesting concept in the world of bonds given that it implies a greater focus on companies with a higher absolute level of debt. This does not automatically imply higher leverage but companies with large debt burdens do at times come under particular pressure, especially if they face more regular refinancing requirements.
In the event that ETFs remain a popular way to buy high yield, a key question is how this might affect the outcome from active funds. The most probable answer is even higher volatility in the more liquid names in the index due to the price-insensitive nature of ETF activity. While this technical-driven volatility could create buying and selling opportunities for the more nimble managers, investors should be aware that it might at the margin make for an even bumpier return profile from what is already a volatile asset class.
The Chicago Board Options Exchange Market Volatility Index (known as VIX) measures the implied volatility of S&P 500 index options – one way of measuring the expected 30-day stock market volatility. This index has historically shown high daily correlations to the performance of the S&P and is therefore one of the tools used by managers seeking to hedge their equity exposure.
One interesting development in the second half of November was that the sharp (and brief) downturn in US equities had very little impact on the VIX. This is unusual and caused problems for some fund managers, for example in the absolute return sector, who were using VIX options in a bid to moderate the downside volatility of underlying equity exposure. As a result, we saw funds fall more sharply than they or investors would have expected over the very short period. And while markets subsequently retraced, the speed and unexpected nature of the downturn at the portfolio level led some managers to cut their exposure for risk reasons and consequently fail to participate in the subsequent rally in equities.
This indicates the potential risk with hedging strategies and the benefit of diversifying portfolio-level hedges across different instruments to help ensure that a portfolio reacts as close to expectations as possible to adverse events, thus mitigating the risk of unexpected volatility stopping out high-conviction positions. It is a truism that markets and associated instruments behave most unexpectedly, perhaps even irrationally, at the times of panic and therefore, by extension, that hedges cause surprises when they are most needed. This is similarly important in fixed income markets, where credit default swaps (CDS) are often used to hedge underlying cash bond exposures; their behaviour can, however, diverge significantly at extremes due in part to the different investor bases of the two markets.
By Anthony McDonald
I recently went to a debate on the Eurozone crisis – one of many I suspect, but this was particularly interesting because it was excellently hosted by a leading political think-tank. The speakers made illuminating points and the debate was lively, but in many ways I couldn’t help but feel a (growing?) gulf between the political and investment communities. Of course, they operate in different areas for the benefit of different constituencies, but given the inextricable interdependence between political and economic outcomes, I was again surprised by the lack of common ground between the two.
Now this is far from a new phenomenon. Back in 2010, the majority of investors to whom we have the privilege of speaking were convinced that the election would result in a solid Conservative majority that would be supportive for capital markets. Now it is, of course, easy to be wise in hindsight but the electoral mathematics made this at best an uncertain outcome – a fact far more widely recognised in political circles.
Turning back to the Eurozone crisis debate led by influential political thought leaders and economists, we heard total opposition to bank recapitalisations and the view that at least Greece and Cyprus should leave the Euro. These are not outrageous arguments, but they are at odds with the perhaps unrealistic expectations of the investment community that are increasingly necessary to avoid a full-scale meltdown in European debt markets. Indeed, perhaps the expectations of the speed of change by the markets is completely unrealistic – they are looking for economic changes that would normally take years to implement.
However, at a time of general agreement that clear political leadership is necessary to address the crisis in a suitably comprehensive manner, it is a concern that there is an apparent gulf between political and economic expectations that appears not to be restricted only to the UK. We have to hope that any such disconnect does not encourage bond market fears to spread to engulf current “safe” countries such as the UK and US, whose fiscal issues have hitherto paled against the Eurozone crisis. And in the Eurozone, hopefully the appointment of technocrat governments in Italy and Greece will help address their problems although we will have to see if the local populations are willing to tolerate the application of painful austerity measures by new, unelected leaders, or if there will be some form of revolt.
By Anthony McDonald
Global equity income has been an increasingly popular destination for investment in recent years. With returns from cash and yields on fixed income at low levels, the desire for income has encouraged many investors to widen their scope of potential asset classes.
Historically, equity income investors in the UK have limited themselves to UK equity, now they are looking further afield. The question has been raised as to whether a separate IMA sector for Global equity income is needed. Much depends on investors’ time horizons. If holding for the long-term then a comparison of Global growth and Global income is perfectly valid and indeed most equity income managers believe they can at the very least hold their own in the wider sector. However, if investors are comparing the performance of funds in the short term then an IMA defined sector is useful, because the performance profile of income and growth funds is very different.
Using Morningstar’s Global Large-Cap Value Equity peer group (into which most Global income funds fall) as a proxy for the income sector, we can see the differences between the two categories. In 2011, to the end of August, the IMA Global Sector is down 9.78% while the Large-Cap Value peer group is down 8.05%. In contrast during 2010, the IMA sector rose by 15.85% while Large-Cap Value was up 11.34% and similar differences can be found in 2009 and 2008. Why is the performance profile so different? To some extent it is due to sectoral differences driven by the search (or not) for yield. On average, Large-Cap Value funds currently hold 13% in Communication Services, while the IMA peer group hold only 6.3%. In contrast, for Basic Materials, Large-Cap Value hold 4.5% compared to 8.1% held by the IMA peer group. Regardless of whether a standalone IMA sector eventually results, investors need to be able to compare like with like and whilst the comparison of Global Income and Global Growth is not quite apples and oranges it may well be like comparing peaches and nectarines.
By Richard Whitehall
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http://www.obsrfundratings.co.uk/Default.aspx?alias=www.obsrfundratings.co.uk/blog
It has been our contention that with such an extended degree of leverage within the developed world (a hangover from the last 2 decades), the only solution was an extended period of very low interest rates to keep the credit system from failing – thereby permitting both corporates and individuals to raise their savings rates, both of which have or are now happening. This reliqification process has been at the expense of the public sector which has extended its debt levels in Keynesian style fashion to be counter-cyclical.
However, and unlike previous economic cycles, the second phase of the recovery led by corporate capex (capital and labour) is being truncated in the developed world as the previous debts are still very high and the corporate sector is nervous. With investors looking to the private sector to take up the running they are hiding as governments and global authorities fail to address what looks to be more like profligacy than stimulus. In many ways this is encouraging. Europe has been living in a dream world for decades and the capital markets are saying reform or fail – ultimately a necessity. Ditto the US where the deck chair shifting fails to address legitimate structural issues.
The question is how far is this priced into asset markets – gold continues to romp away based upon negative interest rates, huge investment buying and fear. Bond yields are plunging to the 08 lows even though the financial system is less geared and notionally less vulnerable. However, as developed world and indeed developing world growth rates fade, the move in yields is understandable. Equities are moving to discount a recession – with PE multiples already at compelling valuations, a recession-inspired type decline in earnings implies more potential downside for equities but the discounting mechanism is rapid and of course the recessionary scenario may fail to materialise. Longer term, the structural growth of the emerging markets remains the key hope for earnings globally – if not the answer to the domestic issues in the developed world.
The markets are currently in a negative feedback loop which is only likely be to broken by strong action from the authorities. The markets are rioting to force their hand – a process where compelling valuations offer limited protection. Investors’ actions here must be dictated by time horizons. Key blue chip yielding stocks are at generationally cheap levels and already appear to offer good value. A long-term mindset would suggest a long-term view would offer significant upside to patient investors. Those of a more nervous disposition may wish to wait and see how inspired and complete the actions by the authorities actually are before committing to the markets.
By Peter Toogood
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http://www.obsrfundratings.co.uk/Default.aspx?alias=www.obsrfundratings.co.uk/blog
After setting out a series of requirements necessary for the US to maintain its AAA rating, S&P has followed through by issuing a downgrade to AA+ as the country fails to meet the targets.
It is hard to blame the agency for its decision – the debt metrics in the US appear increasingly anomalous in the AAA universe. Indeed, the debt/GDP figures are expected to continue to rise given the high budget deficit and the absence of a meaningful long-term consolidation plan. This is a development that many, including Jim Leaviss at M&G, have warned about for some considerable time.
What is the likely outcome? The investment landscape has clearly changed to some degree, given that almost all assets are priced off the “risk-free” US Treasury. In the very short term, we are watching the money markets carefully for signs of stress but our expectation is that the main initial impact will be on sentiment rather than on significant forced selling; according to most of the fixed income managers we have met over recent weeks, government bonds are treated independently in most prospectuses from the ratings requirement on corporate and supranational issues. This should minimise the number of accounts who are physically unable to hold US treasuries at an AA+ rating.
In the longer term, the risk is that investors demand a higher premium for lending to the less creditworthy US government. This would entail structurally higher funding costs for governments, companies etc, effectively threatening to act as a further headwind for investors in bond and equity markets.
More positively, we can only hope that Mohamed El-Erian of PIMCO is correct to identify as a silver lining that the downgrade could force US politicians to take the necessary decisions in addressing the country’s financial sustainability and postpone their political posturing. But of course, the necessary adjustment to prevent a further downgrade implies significant government cutbacks and tax-raising – moves that would threaten the strength of US growth at a time when investors are already extremely concerned about the country’s economic performance.
By Anthony McDonald
To join the conversation on the OBSR blog, please follow this link:
http://www.obsrfundratings.co.uk/Default.aspx?alias=www.obsrfundratings.co.uk/blog
Several credit managers, including the team at TwentyFour Asset Management, have been telling us recently about a particular quirk in the inclusion rules for some of the most widely-used high yield indices. In essence, they do not include high yield companies if they are headquartered in countries whose debt is rated sub-investment grade.
In practice, this has only a minor impact upon the high yield universe and has historically excluded more speculative emerging market issuance. It has, however, taken on a new dimension with the downgrades of Greece and Portugal over recent months and the overnight downgrade of Ireland by Moody’s. While still only a small part of the European credit markets, corporate bonds from these countries could be subject to technical selling from benchmark-oriented strategies if they fall out of the indices.
I should stress that we do not expect a significant longer-term impact on the high yield funds that we rate. All are inspired by bottom-up credit analysis rather than index composition and are in any case relatively light on peripheral Eurozone holdings. We must, however, be aware of the potential for price dislocation in some issues that are popular amongst investors, especially in Ireland where many global companies are headquartered. On the other hand, of course, any such volatility could also create some attractive opportunities for active managers.
by Andy McDonald
To join the conversation on the OBSR blog, please follow this link:
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