New Ratings
Lyxor Ibex 35 ETF – Neutral
Jose Garcia Zarate
Investors simply seeking a tight-tracking, competitively priced passive fund to gain exposure to Spain’s Ibex 35 will find that this Lyxor ETF efficiently fits the bill. As an investment strategy, however, the Ibex 35 provides a less than ideal representation of the available opportunity set. It has a distinct mega-cap bias, it is top-heavy at a single stock level and has been traditionally overweighted in financials. This exposes investors to above-average risk relative to peers with an ability to move down the cap spectrum and/or rebalance away from financials. On that basis, we initiate coverage with a Morningstar Analyst Rating of Neutral.
Upgrades
DAX® ETF (DR) – Bronze
iShares Core DAX® (DE) – Bronze
Lyxor DAX® (DR) ETF – Bronze
Dimitar Boyadzhiev
We have upgraded Xtrackers DAX ETF (DR), iShares Core DAX (DE) and Lyxor DAX (DR) ETF from Neutral to Bronze. At face value, the DAX is not what one would call an ideal index in terms of construction. It encompasses a small number of companies, which results in high exposure to single stocks.
Besides, its mega-cap bias precludes it from deriving potentially higher returns from smaller companies. However, despite these limitations, the DAX has proved a formidable opponent for active managers to beat over the long term. Aside from the ETFs’ meaningful cost advantage, we take a positive view of the level of sector diversification offered by the DAX. As a result, we believe these funds will continue outperforming the average fund in the Morningstar Germany Large-Cap Equity category on a risk-adjusted basis for years to come.
PIMCO GIS Euro Income Bond – Bronze
Mara Dobrescu
This fund has been managed by Eve Tournier since 2013. Although her track record on this vehicle is fairly short, she has demonstrated an effective use of the strategy’s main performance drivers. The fund seeks to meet a stable distribution target, currently set at 4% annually, by investing at least two thirds of its assets in euro-denominated debt and the rest in global bonds, hedged to euros. The investment approach here largely mirrors the one in place on Silver-rated PIMCO GIS Diversified Income, a global version of the strategy Tournier has comanaged since 2010. The fund’s high costs are a headwind to its long-term performance, but we believe it has what it takes to overcome this hurdle.
Downgrades
First State Global Resources – Neutral
Fatima Khizou
Joanne Warner, who became lead manager on these funds in December 2006 and head of the global resources team in 2010, will relinquish her overall responsibilities on July 1st, 2017 and is due to retire from the industry at the end of the following month. Warner brought significant expertise to the management of these funds and also provided investors with a high degree of stability.
Portfolio manager Todd Warren was appointed by the group to take over and he will be sharing portfolio management responsibilities and the team leadership role with the London-based senior portfolio manager Tal Lomnitzer. Warren has been with the team for over a decade and Lomnitzer joined in 2011. At the start of June 2017, the team also lost portfolio manager, Mark Hume, who specialised in energy. These material changes have lessened the appeal of this team and overall strategy relative to some of its peers and we have therefore lowered our conviction.
