Morningstar Fund Ratings: The New Monthly Update

HIFT – HSBC Asian High Yield Bond – Neutral

HIFT – HSBC Asian High Yield Bond benefits from seasoned lead manager Alfred Mui, who brings 27 years of experience and has led this fund since its inception in May 2022, garnering long-term track records here and the investment-grade-focused HIFT–HSBC Asian Bond, where he is also the final decision-maker. However, elevated turnover in its supporting cast justifies caution. Unlike the typical Asian high-yield peer, this fund is more exposed to emerging-markets sovereign and interest-rate risks, as seen from its composite index, which consists of 70% JACI Corporate Non Investment Grade, 20% JACI Sovereign, and 10% JACI Quasi Sovereign, with an ex-ante tracking error range target of 0-3%. The investment process is sensible, but we have some reservations about its execution as turnovers in the credit research team coincided with a meaningful detraction from China property over 2021 and year-to-date 2022. Since then, the team revamped its credit research framework on China property, which we view positively, although it needs more time to prove its efficacy. We initiate the strategy with both People and Process ratings at Average, which support a Morningstar Analyst Rating of Neutral across all ratable share classes.

Niki Wu

Principal Global Investors Funds – Global Property Securities I Acc USD – Silver

Principal Global Property Securities is a solid choice for investors looking for exposure to global listed real estate. Several factors contribute to our positive view. For one thing, the team behind the strategy is experienced and knowledgeable. The three portfolio managers have all been with Principal for at least 15 years, led by Kelly Rush, who has been with the firm since 1987 and on the US version of this fund since its 2007 inception. Five local portfolio managers around the world (two in Singapore and one each in Sydney, London, and Chicago), plus eight analysts provide support. The process underlying this strategy is also strong, using bottom-up fundamental research to identify instances where the team’s expectations differ from the market’s. We initiate coverage on this strategy with a People and Process rating of Above Average, resulting in a Morningstar Analyst Rating of Silver for its cheapest share classes, including the clean I Acc USD share class, while pricier shares are rated Bronze or Neutral.

David Kathman and Thomas de fauw

Royal London Sustainable Growth M – Bronze

Royal London Sustainable Growth is a solid choice for investors looking for a growth-oriented exposure to equities and bonds via a sustainability approach that has been employed in a disciplined manner over time. The fund was launched in May 2022 but forms part of an existing range of multi-asset funds led by Mike Fox since 2009, which has achieved impressive absolute and risk-adjusted returns over the long term. Fox looks to invest in companies that deliver a net benefit to society in terms of the products and services they provide or that show leadership in environmental, social, and governance management.

On the fixed-income side, Shalin Shah looks for similar sustainable characteristics as Fox on corporate issuers. An Above Average view on both People and Process results in an Analyst Rating of Bronze for the fund’s clean M share class and Silver for the cheaper Z share class.

Tom Mills

Schroder Global Sustainable Value Equity – Bronze

The Schroder Global Sustainable Value Equity fund is managed by Simon Adler, Liam Nunn, and Roberta Barr, who sit in the Global Value Team. They work closely with the nine-strong unit, headed by Nick Kirrage and Kevin Murphy. A key strength here is the rigourously applied investment process, which seeks to identify companies trading at significant discounts to their fair values. ESG filtering and analysis come after the initial screen, making diligent use of internal systems and tools. The profile here will likely be similar to the sister Global Recovery fund, but there will be some performance deviations given the portfolio is more concentrated and areas such as energy and basic materials aren’t held. We have seen consistent and disciplined implementation on the sibling strategy, and with a well-rounded sustainable overlay, we initiate coverage with a Morningstar Analyst Rating of Bronze for all share classes.

Jonathan Miller

Upgrades

Schroder ISF Emerging Asia C – Gold From Silver

Schroder ISF Emerging Asia continues to be one of the best Asian equity propositions thanks to its experienced and savvy portfolio manager, sizable supporting cast, and a proven investment process. While we reiterate both the People and Process Pillars at High, changes in the competitive landscape within the Asia ex-Japan equity Morningstar Category have caused the strategy’s clean share class C’s Morningstar Analyst Ratings to be upgraded to Gold from Silver. Other share classes earn Gold to Bronze ratings, depending on fees.

Claire Liang, CFA

Schroder ISF Frontier Markets C – Bronze From Neutral 

Schroder ISF Frontier Markets benefits from an experienced manager and wide resources at Schroders. Although the investment universe can change as companies move in and out of frontier territory, we feel the team’s broad coverage and improved stock selection results are a positive. This results in an upgraded People score to Above Average from Average. Rami Sidani has been the lead manager on this strategy since its inception in December 2010 and has 17 years of frontiers experience. He is well- supported by four dedicated frontier-markets analysts and a wider emerging-markets team at Schroders, consisting of 51 investment professionals, which has been broadly stable and is of good experience. The process, which is a combination of top-down and bottom-up, has led to strong risk-adjusted returns over the manager tenure. The clean C share class has been upgraded to a Morningstar Analyst Rating of Bronze, while the more expensive ones remain Neutral.

Lena Tsymbalyuk

Downgrades

Fidelity Europe N – Silver From Gold

Fidelity Europe’s veteran portfolio manager Victoire de Trogoff remains a key attraction here, but the strategy’s process has become more constrained, which could hamper its ability to generate alpha. The fund’s mandate has been recently amended to comply with French regulations on PEA and ESG label. The former limits the fund’s exposure to United Kingdom- and Switzerland-domiciled stocks to 25% of assets, thus implying a structural 15% underweight to those countries relative to the benchmark as of October 2022. The latter relates to the AMF sustainability label: Under the adopted approach, the fund’s ESG rating must now be higher than its benchmark after removing 20% of the lowest ESG-rated issuers (on a market-cap basis). We think that these constraints make portfolio construction less nimble, leading to a lower Process rating. Having said that, and despite the recent performance missteps, the strategy remains a worthy active option in the Europe large-cap blend space; however, as a result of the revised Average Process rating, the fund’s Morningstar Analyst Rating on the cheaper clean N share class is downgraded one notch.

Francesco Paganelli, CFA 

Jupiter Merian North American Equity (IRL) I USD Acc – Bronze From Silver

Jupiter Merian North American Equity (IRL) continues to be a strong option for those seeking exposure to the US equity space via a quantitative strategy. Its experienced and savvy portfolio manager, sizable supporting cast, and a proven investment process continue to drive our positive conviction. While we reiterate both the People and Process Pillars at Above Average, changes in the competitive landscape within the US Large-Cap Blend Equity Morningstar Category have caused the strategy’s offshore clean I USD share class to be downgraded to a Morningstar Analyst Rating of Bronze from Silver. Ratings for the other share classes range from Silver to Neutral, depending on fees.

Teodor Dilov

Rerated From Under Review

CT UK Equity Income Z – Bronze From Under Review

Following the announcement of Richard Colwell’s upcoming retirement, CT UK Equity Income was placed Under Review. We see some continuity for the strategy under the new manager, Jeremy Smith, but Colwell’s departure will be a clear loss to the team. This results in a Morningstar Analyst Rating of Bronze for the clean Z share class, while more expensive ones are rated Neutral. It was previously rated Silver. Smith joined Columbia Threadneedle in 2015 and currently runs CT UK Opportunities, and the CT UK Institutional funds. He is also head of research for UK equities. In taking on the UK Equity Income mandate, where Jonathan Barber will remain as deputy PM, Smith intends to maintain the distinctive investment process that Colwell has nurtured in this portfolio. He knows the approach well, and has headed up the research process on the UK desk since joining the firm in 2015. We expect continuity in the philosophy and execution here, where there is a large overlap in holdings across other portfolios on the desk.

Daniel Haydon

Jupiter Multi-Asset Income – Neutral From Under Review

Jupiter Multi Asset Income was placed under review in September 2022 following the announced departure of lead manager and Jupiter’s head of multi-asset, Talib Sheikh by year-end. Management responsibility for the fund has now been passed to Jupiter Merlin, the in-house multi-manager specialist team responsible for the Jupiter Merlin fund range. Although this presents another complete shift in people and process after Sheikh’s short tenure as manager, we take sufficient comfort from the experienced Merlin team and their established process, to support a People pillar of Above Average and Process pillar of Average leading to an analyst rating of Neutral across all share classes. It was also rated Neutral under the previous manager.

Tom Mills

TCW Emerging Markets Sustainable Income A – Neutral From Under Review

TCW Sustainable Emerging Markets Income benefits from a seasoned team that has put the strategy’s flexibility to good use. Still, this vehicle’s new sustainability focus brings additional challenges as it partly reduces the team’s investable universe. The fund’s Morningstar Analyst Rating has been

downgraded to Silver from Gold on its cheapest share class, with more-expensive share classes earning Bronze and Neutral ratings. The fund was previously placed Under Review.

Mara Dobrescu

Moved to Under Review

AB European Equity Portfolio I – Under Review From Bronze

AB Eurozone Equity Portfolio I – Under Review From Bronze

AllianceBernstein has announced the departure of Tawhid Ali, the lead manager on AB European Equity Portfolio. We held Ali in high regard as a capable and seasoned investor with his experience stretching back for almost three decades in total. After joining AllianceBernstein in 2003, he got very well accustomed with the firm’s value franchise, serving first as an analyst and head of research before taking responsibility as a portfolio manager on this strategy in January 2012. At the same time, he was named CIO of European Value Equities. He will be succeeded, both in the capacity as lead manager and as CIO of European Value Equities, by Andrew Birse, who joined Ali as comanager in 2016 after following a similar career path having joined the firm as an analyst in 2010.

Birse was a likely successor to Ali as he operated as his right-hand man, which was exemplified by their close collaboration and all supporting analysts based in Europe reporting to him. Going forward, Birse will be accompanied by Jane Bleeg. She joined the firm in 2016 as an analyst covering European healthcare and consumer companies, and has almost two decades of financial industry experience, but none as a portfolio manager. The two co-managers, who reside in the firm’s Global Equity Value Research team, keep the support of the analysts within that team covering European stocks. Including Bleeg, who will retain her research coverage responsibilities, this totals eight fundamental equity analysts and two quantitative research analysts. Ali’s departure comes after some unusually high turnover among these supporting analysts in 2022. While the team had been stable historically, three team members left, including two of the team’s most recent hires (both had joined the firm in 2019) and a very experienced analyst covering financials. Meanwhile, the US-based analyst on telecom companies will soon relinquish his European coverage responsibilities. The firm has hired three people in 2022 already and is in the process of adding another analyst, which keeps headcount steady, but the new joiners are all less experienced.

While we were unsettled by the analyst turnover, we maintained the People Pillar score for this strategy at Above Average given, among other things, the strong leadership provided by its cohesive comanager duo. The strategy is losing its most-experienced skipper and we think necessitates a reassessment of our conviction in this team, and therefore are placing the strategy’s Morningstar Analyst Rating Under Review. Previously the ratings ranged from Silver for the strategy’s cheapest share classes to Neutral for the most expensive ones, with the clean I share class rated Bronze.

Ronald Van Genderen, CFA

BGF United Kingdom D – Under Review From Bronze

Blackrock UK D – Under Review From Bronze

Following the announcement that Nick Little, who has been the lead manager of the BlackRock UK and the BGF United Kingdom funds, is leaving the investment team with immediate effect, both strategies have been placed Under Review. Roland Arnold within the Emerging Companies team has taken over portfolio management for BlackRock UK and Luke Chappell within the UK Core Equity team has taken over portfolio management for BGF United Kingdom funds. We will organize a formal review meeting with the Emerging Companies team at BlackRock in order to find out more information about the new management of the funds, what impact will Little’s leave have on the team’s resource, and what the team structure will look like going forward. The clean D share classes for both the BlackRock UK and the Luxembourg-domiciled BGF United Kingdom were previously rated at Bronze.

Teodor Dilov