Update on the Rated Funds ‘under review’ in the third quarter

Andrew Pitts delivers a review of Money Observer’s Rated Funds for the third quarter of 2018.

Each quarter, Money Observer takes a look at our active Rated Fund list, providing a breakdown on a sector-by-sector basis. 

Funds that are placed under revieware highlighted. This could be down to a manager change, performance concerns or a soft closure. We also keep an eye on high premiums and place investment trusts that look expensive under Premium Watch. Being placed under review is not a sell recommendation, as the fund or trust remains a Rated Fund. It does, however, indicate that our investment committee has some concerns and therefore does not view the fund as a buy for new investors. 

The review (and performance figures contained within) covers the start of July to 30 September 2018.

Jupiter India

We are keeping the recent disappointing performance of this fund under review. Its largest holding, Hindustan Petroleum, has been badly hit by fears that the government may re-instate fuel subsidies to counter rising oil prices. Shares in Reliance Capital, its third largest holding, have been impacted over contagion concerns from problems at Reliance Communications, which has the same majority shareholder as Reliance Capital.

Fund manager Avinash Vazirani is keeping faith in both positions, while also maintaining an underweight position in IT services companies. These have hitherto performed very strongly, but many of the sector’s constituents don’t meet the fund’s ‘growth at a reasonable price’ investing criteria.

As a result, the fund continues to underperform the MSCI India index benchmark. In the third quarter the fund lost 12.2% against MSCI India loss of -0.8%. After one year the fund has lost 20% while the index has gained 4%.

Strategic Equity Capital IT

The past quarter to 30 September saw a marked improvement in performance, with several portfolio companies reporting record annual results: the trust was up 5.5% compared with the FTSE Small Cap (ex IT) benchmark return of -2.1% and a UK smaller companies sector average return of 1.6%. Over one year the trust is up 3%, beating the index return of 0.6% but behind the sector average gain of 11.5%.

This underperformance against peers is a further reflection of the trust’s hands-on, private equity style of management, where capital appreciation from its concentrated portfolio can often take time to materialise.

Given the trust’s clear value-oriented style and focus on non-cyclical domestic companies and portfolio companies with overseas earnings, we believe the medium-term outlook looks comparatively good. We have therefore removed the trust’s ‘under review’ status.

BlackRock Emerging Europe IT

Shareholders will vote on the trust’s liquidation proposals – to take cash or roll over their holdings into fellow Money Observer Rated Fund BlackRock Frontiers IT, in November.

Existing shareholders may wish to wait for the liquidation of the trust’s assets and opt for either of the board’s proposals, if the resolution is adopted. In the meantime, we are removing the trust from the Rated Funds list and will seek a replacement at the forthcoming annual review.

Rated Funds managed by M&G

M&G Investments is in the process of transferring non-sterling share classes in its range of open-ended investment companies (Oeics) to Luxembourg, where they will adopt Sicav status.

The firm is taking these measures to protect the interests of non-UK investors during the Brexit negotiation process and after the UK’s exit from the EU.

Sterling share classes in all of the funds will retain their UK Oeic status, but dealings in all the funds will be suspended for at least two days while the transfers, which are staggered in tranches, take place.

Two Rated Funds, M&G Global Macro Bond and M&G Japanese Smaller Companies, are going through the transformation process from 26 October. M&G European Corporate Bond is scheduled for 9 November and M&G Emerging Markets Bond for 7 December.

Although all of the funds will continue to be run in tandem, by the same managers, but assets under management in the rump of the UK Oeics will fall, by varying degrees. As a result, ongoing charges on these funds are expected to rise, but only by a few basis points, according to an internal document seen by Money Observer.

Most at risk of rising charges is M&G European Corporate Bond, which will see AUM fall by around 90% to £154 million. The Emerging Markets Bond fund’s AUM will drop by an estimated 63% to £353 million; Japan Smaller Companies by 53% to £133 million; and Global Macro Bond by 44% to £883 million.

We do not currently find any reason to review the Rated status of these funds, but investors need to bear in mind that trading will be suspended while the domicile transfers take place.

Manager changes

Dean Newman, head of emerging market equities at Invesco and previously the sole manager of the Invesco Perpetual Global Emerging Markets fund, will retire in January next year. His colleague Stuart Parks, head of Asian equities, will also retire next summer.

Since the September announcement, Invesco has merged its emerging markets and Asia equities investment desks, under the control of William Lam and Ian Hargreaves. The latter manages Money Observer Rated Fund Invesco Asia and both have now assumed co-management responsibilities for the Global Emerging Markets fund.

Both are highly respected investors and we see no reason to review Rated Fund status on either the fund or the trust.

Fidelity’s bond market veteran Ian Spreadbury, manager of the £3.6 billion Fidelity Moneybuilder Income fund since 1995, has announced his decision to retire in January. Deputy manager Sajiv Vaid, deputy manager since August 2015, will assume lead manager responsibilities.

The fund has been a safe and solid, if unspectacular, performer in recent years and we will review its status as a Rated Fund in the forthcoming annual review.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment