Morningstar Fund Ratings: Weekly Round-up

We have initiated coverage on L&G Multi-Index range for Fund 3 through to Fund 6, while Fund 7, which has a significant allocation to equities, is not covered. This actively managed low-cost range is designed to meet investors’ risk targets based on annualized volatility, and it benefits from a well-structured and institutionallike investment process that has been designed by an experienced and collegiate team.

The team employs a clear, simple, and repeatable process centred on assessing value based on each asset class’ fundamentals, valuations, tail-risk characteristics, and diversification benefits over the longer term. However, medium- to short-term tactical decisions are employed to navigate a prevailing macroeconomic environment. An experienced multi-asset manager, Justin Onuekwusi, is firmly in control of the management of the range. Since launch in 2013, the range has been managed consistently and has delivered on its objectives of providing attractive returns in a risk-controlled framework. We initiate a coverage with a Morningstar Analyst Rating of Silver for clean I share class. 

Xtrackers ESG Emerging Markets ETF – Neutral

Briegel Leitao

Xtrackers ESG MSCI Emerging Markets ETF offers a screened portfolio of emerging-markets stocks from the wider MSCI Emerging Markets universe. The strategy is designed to exclude laggards on several environmental, social, and governance metrics, such as carbon emissions and controversial weapons. While stocks with good ESG credentials are the focus, investors are exposed to heavy country and stock concentration risks and an arguably less diversified portfolio relative to standard passive emerging markets funds. A key advantage for the fund is its fee, which is low when compared with both active and passive Morningstar Category peers. Despite this, given the concerns surrounding portfolio construction, this strategy has been awarded a Morningstar Analyst Rating of Neutral, reflecting a lack of conviction in its ability to significantly outperform peers over the long run.

Xtrackers ESG MSCI Japan ETF – Bronze

Kenneth Lamont

This fund offers ESG-screened, low-cost passive exposure to Japanese equities in a category in which index funds have proved difficult to beat. Its environmental, social, and governance screens are strict, excluding 60% of the market, but are implemented in such a way that the strategy retains the core strengths of a market tracker. The fund tracks the MSCI Japan ESG Leaders Low Carbon ex Tobacco Involvement 5% Index.

This strategy applies both the MSCI ESG Leaders’ and MSCI Low Carbon Leaders’ sustainability screens to the MSCI Japan Index. This process cuts the bottom 50% of companies based on their ESG scores and the top 20% based on carbon-emissions intensity. A final hard screen is applied, which excludes tobacco producers or those that earn 5% or more revenue from tobacco-related products, before holdings are weighted by their market capitalisation. The fund has an ongoing charge of 0.20%, making it much cheaper than most active or passive peers in the Japan large-cap equity Morningstar Category. For these reasons, we have assigned this fund a Morningstar analyst rating of Bronze.

Upgrades

iShares $ High Yield Corporate Bond ETF – Bronze from Neutral

Jose Garcia Zarate

This is a useful instrument for investors to quickly lock in all-maturity positions in the most liquid segment of US high yield market, while its significant cost advantage relative to active peers in the category is bound to support returns over the long-term. This remains an asset class where experienced active managers can add value over a standard index-tracking mandate. But this strategy’s low fee provides a nice tailwind at all times. On this account, its Morningstar Analyst Rating has been upgraded from Neutral to Bronze.  

iShares MSCI EM SRI ETF – Bronze from Neutral

Briegel Leitao

IShares MSCI Emerging Markets SRI presents an attractive option for investors looking to make a socially conscious allocation to emerging markets. The fund’s competitive fee and sound portfolio construction are all supportive of a Morningstar Analyst Rating of Bronze. The fund tracks the MSCI Emerging Markets SRI Select Reduced Fossil Fuels Index. Like other MSCI SRI strategies, the methodology aims to select the top 25% of the free-float adjusted market capitalisation of the emergingmarkets equity market while maintaining similar sector weightings to the non-ESG parent benchmark, the MSCI EM Index. In addition to a 5% cap on single-stock weights, this strategy also avoids fossil-fuel extractors and producers, an exclusion that is not part of the standard MSCI ESG Business Involvement Screening.

PIMCO Short-Term High Yield Corporate Bond ETF – Bronze from Neutral

Jose Garcia Zarate

Index-tracking strategies for the high yield bond market do not cover the entire opportunity set. However, its comparatively low fee provides support to returns at all times, while the short maturity focus reduces interest rate risk.   On this account, its Morningstar Analyst Rating has been upgraded from Neutral to Bronze.  

UBS ETF MSCI Emerging Mkts – Bronze from Neutral

Briegel Leitao

UBS MSCI Emerging Markets has been awarded a Morningstar Analyst Rating of Bronze, representing conviction in the fund’s ability to outperform category peers over the long-run. The fund offers a best-in-class, environmental, social, and governance-screened portfolio that excludes companies on a number of different ESG metrics, such as but not limited to carbon emissions and controversial weapons. The fund’s index, the MSCI Emerging Markets SRI 5% Issuer Capped Index, offers large- to mid-cap exposure, covering about 25% of the free-float adjusted market capitalisation of the emerging-markets equity market. The index methodology aims to maintain similar sector weightings to the parent benchmark, the MSCI EM Index, with the 5% single-stock weight limit helping to ensure sufficient diversification at the stock level.

UBS(Lux) Investment China A Opportunity – Gold from Silver

Claire Liang

UBS (Lux) Investment SICAV - China A Opportunity continues to benefit from a top-notch lead portfolio manager and a time-tested investment approach, and we have reiterated its People and Process Pillar ratings at High and Above Average, respectively. Under our enhanced ratings framework, which places a greater focus on fees and expected benchmark-relative performance, the strategy’s Morningstar Analyst Rating was upgraded to Gold from Silver across on all its share classes.

Downgrades

Amundi IS S&P 500 ETF – Silver from Gold

Briegel Leitao

The Amundi S&P 500 ETF is expected to continue to outperform its Morningstar Category peers over the long term. Passive investment approaches such as the one offered with this strategy have become the standard for investors looking to gain exposure to large-cap US equities, supporting the strategy’s Morningstar Analyst Rating of Silver. The parent index, the S&P 500, offers giant- to mid-cap exposure and consists of 500 names, covering about 80% of the free-float adjusted market capitalisation of the US equity market. This results in a well-diversified index, at both the stock and sector level. At an ongoing charge of 0.15%, the fund is priced attractively versus active peers who typically charge between 0.70% and 1.20%. However, there are cheaper passive options that track the S&P 500 index, with some priced below 0.10%.

BlackRock Global Dynamic Equity – Neutral from Bronze

Natalia Wolfstetter

The fund continues to benefit from a flexible, broadly diversified, and risk-aware approach, supporting an Above Average Process rating, but it has experienced multiple manager changes in recent years, keeping its People rating at Average. Under our new ratings framework, which places a greater focus on fees and benchmark-relative performance expectations, the Morningstar Analyst Rating for all the fund’s share classes has been downgraded to Neutral from Bronze.

Brandes Emerging Markets Value – Bronze from Silver

Andrew Daniels

Brandes Emerging Markets Value continues to feature a solid investment team and a consistent value-oriented approach. That said, under our enhanced ratings framework, which places an added emphasis on fees and expected benchmark-relative performance, the Morningstar Analyst Ratings on the vehicle’s cheapest share classes - including the I USD clean share class - fell to Bronze from Silver, while the more expensive share classes were lowered to Neutral. 

JPM US Aggregate Bond – Bronze from Silver

Samiya Jmili

Seasoned collaborators ply a bottom-up value-conscious process to selecting securities that has resulted in a compelling record for JPM US Aggregate Bond. The experienced and well-resourced investment team of this conservative mortgage-focused fund seeks attractive cash flows with low volatility at a good price through a time-tested approach. Our conviction in the team and process has not changed. However, under our enhanced ratings framework, which places a greater focus on fees and benchmark relative performance, the Morningstar Analyst Rating for the I Acc USD share class is lowered to Bronze from Silver. The most expensive share class is rated Negative, while the cheaper ones are rated Bronze or Neutral.

Note: Under the Morningstar Analyst Rating methodology, different fund share classes may have different ratings