Morningstar Fund Ratings: Weekly Round-up

Schroder China Equity Alpha – Silver

Chloe Qu

We initiated coverage of Schroder China Equity Alpha with a Morningstar Analyst Rating of Silver across all its share classes. Lead portfolio manager Jack Lee is a veteran investor who has run the strategy since its 2013 inception. He is supported by Schroders Greater China team, which has one of the largest China A-share research capabilities in the region. We also like the team’s well-structured quality growth-focused investment process, which has been proven over multiple market cycles across Schroders’ Asian offerings. Lee’s execution has been strong since the strategy’s inception, generating consistent and solid long-term returns.

First State China A Shares – Silver

Chloe Qu

We initiated coverage of First State China A Shares with a Morningstar Analyst Rating of Silver for its clean share class III. The rating for its more-expensive retail I share class is Bronze. The strategy is run by experienced China A-shares manager Quanqiang Xian, who is supported by one of our favourite teams in the region. It differentiates itself with a strong investment culture that promotes an alignment of interest with investors and a focus on long-term returns. The strategy’s robust and disciplined investment process focused on quality stocks further adds to its appeal.

First State China A Share B – Bronze

Chloe Qu

We have initiated coverage of First State China A Shares with a Morningstar Analyst Rating of Bronze for this QIAIF vehicle’s B share class. The strategy is run by experienced China A-shares manager Quanqiang Xian, who is supported by one of our favourite teams in the region. It differentiates itself with a strong investment culture that promotes an alignment of interests with investors and a focus on long-term returns. The strategy’s robust and disciplined investment process focused on quality stocks further adds to its appeal.

Upgrades

Dimensional UK Core Equity – Gold

Dimitar Boyadzhiev

The low-cost Dimensional UK Core Equity offers comprehensive exposure to UK stocks. The fund overweights stocks with lower valuations, smaller market capitalisations, and higher profitability based on research showing that stocks with those characteristics have tended to outperform over the long term. As a result, it achieves good balance between a smaller-company tilt and quality characteristics. We expect the fund to continue producing superior risk-adjusted returns relative to peers and have upgraded its Morningstar Analyst Rating to Gold from Silver.

iShares DivDAX ETF – Neutral

Dimitar Boyadzhiev

We lack confidence in iShares DivDAX ETF’s ability to deliver sustainable outperformance relative to its category peer over the long term. The small number of stocks represents concentration and idiosyncratic risk, whereby the fund’s returns can be materially affected by a small number of stocks. Historically, approximately half of the fund’s portfolio has been made up of just five companies. Moreover, the fund does not apply stringent quality or sustainability screens to pre-empt losses from dividend cuts. Despite this, the fund has outperformed the bottom 15% of the funds in its category. This, coupled with its low fee of only 0.31%, warrants an upgrade to a Morningstar Analyst Rating of Neutral.    

FTSE 100 ETFs and OEICs – Bronze

Dimitar Boyadzhiev

We have upgraded the HSBC FTSE 100 Index Fund, iShares Core FTSE 100 ETF, L&G UK 100 Index, Lyxor FTSE 100 ETF, and the Vanguard FTSE 100 ETF to Bronze from Neutral. At face value, the FTSE 100 is not what one would call an ideal index in terms of construction. Compared with the comprehensive FTSE All Share Index, it encompasses the UK’s 100 largest companies, which results in a bias towards large caps and giant caps. This precludes it from deriving potentially higher returns from smaller companies. However, despite these limitations, the FTSE 100 has proved a formidable opponent for active managers to beat over the long term. Aside from the funds’ meaningful cost advantage, we take a positive view of the level of sector diversification. As a result, we believe these funds will continue outperforming the average fund in the UK large-cap equity Morningstar Category on a risk-adjusted basis for years to come.

Nomura Japan Strategic Value – Bronze

Hiroaki Sato

The strategy is managed by experienced and long-tenured lead manager Kentaro Takayanagi, with support from a dedicated investment team and well-resourced in-house equity research team. Despite recent efforts to implement a number of process enhancements, the strategy’s performance has yet to meaningfully improve, so we believe these enhancements warrant careful monitoring. Under our new ratings framework, which places a greater focus on fees and benchmark-relative performance, the Morningstar Analyst Rating for the fund’s cheapest R share class has been upgraded to Bronze from Neutral, while other share classes remain at Neutral. 

Downgrades

First State Regional China – Silver

Germaine Share

We continue to have confidence in First State Regional China’s experienced and savvy portfolio manager Martin Lau, his strong supporting team, and a time-tested quality-focused investment process. Under our new ratings framework, which places a greater focus on fees and benchmark-relative performance expectations, the Morningstar Analyst Rating for the Singapore-domiciled vehicle is lowered to Silver from Gold.

First State Dividend Advantage – Silver

Germaine Share

We continue to have confidence in First State Dividend Advantage’s experienced and savvy portfolio manager Martin Lau, his strong supporting team, and a time-tested quality-focused investment process. Under our new ratings framework, which places a greater focus on fees and benchmark-relative performance expectations, the Morningstar Analyst Rating for the Singapore-domiciled vehicle is lowered to Silver from Gold.

iShares Core GBP Corporate Bond – Neutral

Jose Garcia Zarate

IShares Core GBP Corporate Bond may appeal to investors seeking a pure play on the market of corporate bonds denominated in Pound Sterling. However, the purity of the exposure makes it an outlier in its Morningstar category where most peers – including passive ones – straddle into semi-government and collateralised bond territory. As a result, the strategy’s risk profile is higher, capturing more of the upside but significantly more vulnerable in downturns. Within our new ratings framework this currently befits of a Morningstar Analyst Rating of Neutral. 

iShares MSCI USA SRI – Bronze

Dimitar Boyadzhiev

The MSCI USA SRI ETF provides exposure to US companies that exhibit high environmental, social, and governance scores; avoid controversial activities; and are involved in the production, usage, and storage of fossil fuels.  While the process leads to higher stock concentration, the ESG selection process is conducted on a sector-relative basis. Thus, the sector allocation remains broadly in line with its parent MSCI USA Index. The latter is a well-diversified and broadly representative benchmark for the US equity market that has proved difficult for active fund managers to beat. To improve the fund’s diversification, iShares caps the weight of each individual constituent at 5%. However, the fund’s ongoing charge of 0.30% is high relative to the very cheapest passive peers. For these reasons, we have awarded this fund a Morningstar Analyst Rating of Bronze.  

Invesco Global Investment Grade Corporate Bond – Neutral

Louise Babin

Headed by lead manager Lyndon Man since 2013, the Invesco Global Investment Grade Corporate Bond strategy follows a thematic and relative value approach to investing. The credit team identifies longterm themes and trends in the credit market structured around five risk factors: capital structure, sector, region, basis, and curve term structure.  The strategy benefits from the breadth of resources at Invesco and employs a distinctive approach to credit investing, but the majority of the fund's share classes are expensive given the fairly limited expectations for active managers to beat the Morningstar Category index durably and on a risk-adjusted basis. Hence, under our new methodology, the Morningstar Analyst Rating for the strategy’s clean share class (C USD) is lowered to Neutral from Bronze. More expensive share classes are rated Negative.

Moneta Multi Caps – Silver

Samiya Jmili

We think very highly of this fund for various reasons. It has a solid team led by a seasoned portfolio manager, a thorough and time-tested distinctive process, and a parent culture with exemplary stewardship practices. That said, we also think that the strategy’s potential is somewhat undermined by the existence of a performance fee and a relatively expensive pricing structure across all its share classes. Because we have put more emphasis on fees in our updated framework, we have downgraded the strategy’s cheapest RD share class to a Morningstar Analyst Rating of Silver from Gold. The most expensive share classes land at Bronze.

Robeco New World Financial Equities – Neutral

Jeffrey Schumacher

We have downgraded Robeco New World Financial Equities to a Morningstar Analyst Rating of Neutral from Bronze following two departures from its close-knit team. In December 2019, Robeco announced that comanager Christian Vondenbusch and fintech analyst Jeroen van Oerle left the firm. As a result, the strategy is now under the sole responsibility of Patrick Lemmens. Although Lemmens is a specialist in the financials sector and has been the key decision-maker here since his arrival in October 2008, the loss of dedicated resources and their experience is a serious blow to the fund. In addition, Lemmens’ workload has increased as he now also manages the Robeco Global FinTech Equities strategy, which he launched with Van Oerle in 2017, by himself. Lemmens is stretched so thin that we no longer have a positive conviction on his ability to perform as well as before. Lemmens receives interim support from two portfolio managers, but they have other primary responsibilities. Robeco plans to backfill the vacant positions.

Schroder ISF Global Convertible Bond – Neutral

Evangelia Gkeka

Schroder ISF Global Convertible Bond is run by Peter Reinmuth, who has more than two decades of experience managing convertible-bond portfolios, and Chris Richards, who was named as comanager in 2013. The duo is supported by two other managers, and the approach is primarily based on security selection. The managers screen the universe and select the most attractive convertible bonds within each region, based on the valuation of the underlying stocks as well as their technical characteristics. This bottom-up process has been executed in a consistent and successful manner over the years, but overall supporting resources are fairly slim. Under our enhanced ratings framework, which places a greater focus on fees and benchmark-relative performance, the Morningstar Analyst Rating for the strategy’s clean share class (C) is lowered to Neutral from Bronze. Cheaper share classes are rated Silver and Bronze

Note: Under the enhanced Morningstar Analyst Rating different share classes of funds may have different ratings