Morningstar has set up a new investment trust rating service with its first set of research seeing Anthony Bolton’s high-profile China special situations trust given a neutral rating.
The ratings are gold, silver, bronze, neutral and negative and are based on analysts at the firm assessing five key factors when rating the trusts. These are manager and support research team and their process, the board of directors, performance, and fees. Ratings will be reviewed every six months.
Four investment trusts were given a neutral rating, with six investment trusts awarded a gold rating, 11 rated silver, and 11 bronze. None of the 32 trusts was given a negative rating.
Three out of the four investment trusts rated neutral are Asia investment trusts.
These are the £511.8m Fidelity china special situations, £283m Henderson Far East income and the £128.2m Martin Currie Pacific trust. The £517.4m Merchants trust is also given a neutral rating and is in the UK growth and income sector.
Henderson Far East income manager Mike Kerley says performance on the firm’s trust has been hit over the last 18 months by an overweight position in China.
He says: “Our exposure to China means we have an exposure to Hong Kong dollars and so US dollars because they are linked. The US dollar has been weak.”
Kerley says despite this, he is holding on to this position as he expects the dollar to get stronger.
Whitechurch Securities managing director Gavin Haynes says ratings from an independent agency will give advisers peace of mind when recommending trusts. In response to the neutral rating on Henderson Far East income , he highlights the fact that it still has a good long-term track record.
Hargreaves Lansdown senior analyst Meera Patel says some of the neutral ratings reflect the fact that China is a difficult market. She says: “China has a big question mark over it as there is concern there might be a hard landing. There is still scepticism that inflation may shoot up again in China and the crisis in Europe has an impact on China.”
Patel says Fidelity’s Anthony Bolton’s long-term track record cannot be ignored as the bad periods have been outweighed by the good ones. Martin Currie head of intermediary sales Alan Burnett says the management transfer from John Millar to Andrew Graham and changes in the investment mandate, by reducing the trust’s holdings and lowering the fixed exposure to Japan last year, will be recognised soon.
In response to the neutral rating, Merchants trust manager Simon Gergel says: “During the last 12 months, the Merchants trust has outperformed its benchmark index by 8.7 per cent in terms of share price total return and 2.3 per cent in terms of NAV total return.”
Yellowtail Financial Planning managing director Dennis Hall says the service will be a valuable tool for advisers. He says: “The methodology and process they use at Morningstar is good and rating investment trusts is useful. A lot of IFAs will do a crude sift on the open-ended fund side and they have not been able to really do that on the closed-ended side.”
But he suggests some of the trusts given a neutral rating should perhaps have received a lower score. He says: “In those investment trusts, managers have underperformed the benchmarks and in some respects you wonder why they have only been given neutral. I think it needs to be seen to be fair perhaps. There is possibly a bit of politics in there.”
Kohn Cougar IFA principal Roddy Kohn says advisers must remember that, despite any rating system, the IFA is ultimately responsible for the advice and ratings will always only be of limited use.
He says: “Rating systems should always be welcomed but in an increasingly litigious marketplace unfortunately complex products should be avoided like the plague, so the substance of them and their usefulness to IFAs is limited.
“What is worse is that the ratings are going to lull consumers into a false level of comfort when they are buying direct.”