Morningstar Fund Ratings: The Weekly Update

Amundi IS Global Aggregate 500M ETF – Bronze

Jose Garcia-Zarate

The global multisector nature of the Amundi Global Aggregate fund can make it work as a one-stop-shop solution to meet developed fixed income exposure in a portfolio. The fund is expertly managed, has a tight tracking record and its very low fees are its key point in favour. Still, the obvious trade-off of adopting a passive approach to the global bond market is the lack of flexibility in country/sectors/duration calls, relative to flexible mandates. This makes a standard index-tracking approach to the global aggregate bond market something of a blunt investment proposal; good enough for uncomplicated beta but leaving room to add value. The fund is awarded a Morningstar Analyst Rating of Bronze.

Amundi IS MSCI Emerging Markets ETF DR C – Bronze

Monika Dutt

Amundi’s IS MSCI Emerging Markets fund is broadly diversified and has a low fee, but it is exposed to emerging-markets-specific risks that may not be compensated. It earns a Morningstar Analyst Rating of Bronze. This broad portfolio helps mitigate the impact of the worst-performing stocks. It holds more than 1,400 names and its 10 largest positions account for around 25% of its assets. Despite the benefits, emerging markets face greater risks than their developed counterparts. The addition of A shares and relatively strong performance from Chinese stocks have led to a growing concentration in the Chinese market. On top of that, political risks are more prominent in these markets than developed economies. Russia’s recent invasion of Ukraine brought such risks to the forefront. Shortly after the invasion, MSCI removed Russian stocks from the fund’s target index. However, the fund’s broad diversification and low KIID Ongoing Charge of 0.20% should provide a durable advantage over the long-term.

M&G European Sustain Paris Aligned – Silver

Bhavik Parekh, CFA

The strong execution of a well-formed investment process makes M&G European Sustain Paris Aligned an attractive offering for European equity exposure. John William Olsen has many successful years’ experience managing European equities, including at Danske Capital where he managed European and global equities before joining M&G in 2014. In 2021, two changes were made to the fund. Firstly, the benchmark changed from a pan-Europe to an ex-UK benchmark (MSCI Europe ex-UK), and secondly, the process now aims to align itself with the Paris agreement. The latter means the process was adapted to include carbon research. The aim of this is to help identify companies which have a meaningful plan to reduce their carbon emissions using science-based targets, and thus aligning the portfolio to the Paris agreement to limit temperature rises to 1.5 degrees. Furthermore, there is the requirement for the portfolio to have a weighted carbon intensity at least 50% lower than the benchmark. Despite the changes to the remit, we retain conviction in the approach and the team’s detailed research, having rated the pan-European version of this strategy for a number of years. All share classes thus receive a Morningstar Analyst Rating of Silver.

Upgrades

iShares FTSE MIB ETF – Neutral from Negative

Monika Dutt

iShares FTSE MIB ETF offers exposure to a concentrated portfolio of 40 large-cap Italian equities. While the strategy includes the 40 largest and most liquid Italian companies, it lacks diversification at both the stock and sector level. This leaves a long tail of stocks that active managers can potentially add value with, particularly in a market where mid-cap stocks have historically outperformed on a risk-adjusted basis. This year, we have retained this fund's Process Pillar of Below Average. However, we have chosen to upgrade the fund from Negative to Neutral. This is because the fund's low fee of 0.33% gives it a significant advantage over active funds which charge between 1.70% to 2.20% in this category.

JPM Global Income C (acc) EUR – Silver from Neutral

Hunter Beaudoin

JPM Global Income is backed by an experienced portfolio management team that leverages an ever-evolving number of underlying sleeves to invest across asset classes and markets. Supported by Eric Bernbaum, Michael Schoenhaut is a tenured and collaborative manager who has remained at this strategy’s helm since its inception. Along with the multi-asset solutions manager research team, he takes a first-hand role in vetting and approving the addition of portfolio managers to the strategy’s underlying asset class sleeves. Stabilised sleeve manager turnover and continued conviction in Schoenhaut and Bernbaum underpin an upgrade of the People rating to Above Average from Average. The strategy’s comprehensive and well-structured tactical asset-allocation process remains intact and continues to support a Process rating of Above Average. This results in an upgrade of the Morningstar Analyst Rating to Silver from Bronze and Neutral or Bronze from Neutral for cheaper share classes. The clean C (acc) EUR share class is upgraded to Silver from Neutral. More-expensive share classes retain their Neutral rating.

Lyxor FTSE MIB ETF – Neutral from Negative

Monika Dutt

Lyxor FTSE MIB ETF offers exposure to a concentrated portfolio of 40 large-cap Italian equities. While the strategy includes the 40 largest and most liquid Italian companies, it lacks diversification at both the stock and sector level. This leaves a long tail of stocks that active managers can potentially add value with, particularly in a market where mid-cap stocks have historically outperformed on a risk-adjusted basis. This year, we have retained this fund's Process Pillar of Below Average. However, we have chosen to upgrade the fund from Negative to Neutral. The fund's low fee of 0.35% gives it a significant advantage compared to active funds, which charge between 1.70% to 2.20% in this expensive category.

Robeco Global Credits FH – Bronze From Neutral

Shannon Kirwin

Morningstar has upgraded the Process Pillar score for Robeco Global Credits from Above Average to High, resulting in an upgrade for the fund’s FH share class from Neutral to Bronze. The global investment-grade credit fund’s managers, Victor Verberk and Reinout Schapers, have plied a thoughtful and risk-aware process since the fund’s inception in 2014, consistently adding value both through bottom-up security selection and through top-down macro positioning. The team’s consistent execution of their strategy, as well as the stability of the credit research team backing the managers, prompted the upgrade.

Downgrades

Legg Mason Royce US Small Cap Opportunity X – Negative from Neutral

Dan Culloton

Still dealing with the repercussions of a major management change, the Morningstar Analyst Rating for the clean X share class for Legg Mason Royce US Small Cap Opportunity is downgraded from Neutral to Negative. Other share classes range from Neutral to Negative, depending on fees. It's been a year since Royce Investment Partners recalled former longtime lead manager and approach architect Boniface "Buzz" Zaino to train a new stock-picking crew after the previous team Zaino had mentored left for a competitor in April 2021. While Zaino returned to senior advisor status in October 2021, it's still not clear the current managers will execute the strategy as well as Zaino and his immediate successor did, resulting in a reinstatement of the strategy’s Below Average People rating. Zaino stepped back from day-to-day operations, leaving the team with a tricky contrarian approach that may prove hard to master. It entails looking for statistically cheap stocks that are under clouds but showing signs of improvement. The managers here are still proving themselves with this strategy's unique but volatile approach. That drops its Process rating to Average from Above Average.

Stewart Investors Asia Pacific Leaders Sustainability VI – Silver from Gold

Justin Walsh

Stewart Investors Asia Pacific Leaders Sustainability remains an excellent choice for investors. However, our conviction is slightly tempered due to the strategy’s notable bias towards small- and mid-cap names, a large degree of crossover in holdings across the firm, and significant holdings in India. For this reason, capacity is a watchpoint. Hence, we have downgraded the Process rating to Above Average from High, resulting in a downgrade of the strategy’s clean VI share classes to a Morningstar Analyst Rating of Silver from Gold, while its more expensive share classes are downgraded to Bronze from Silver. Notwithstanding this, the strategy continues to be led by an excellent team. David Gait has led this strategy since July 2016, and he is joined by co-manager Sashi Reddy. Gait is an experienced investor with more than 20 years at the firm and has led the all-cap-focused Stewart Investors Asia Pacific Sustainability strategy, an all-cap strategy, since 2005, so he knows this territory well.

Moved to Under Review

UBS China Allocation Opportunity – Patrick Ge, CFA