Morningstar Fund Ratings: Monthly Update

Loomis Sayles Sustainable Euro Credit I/A – Bronze

Jeana Marie Doubell

Loomis Sayles Sustainable Euro Credit, launched in May 2021, boasts an experienced portfolio manager team plying a robust process. It has earned Above Average scores for both its people and process pillars. Its share classes received Morningstar Analyst Ratings of Silver, Bronze and Neutral, with clean I/A share class earning Bronze. The seven-member portfolio manager team joined Loomis Sayles in November 2020 from Kempen, where they were involved in running a similar strategy for many years with impressive results. Rik den Hartog, Pim van Mourik Broekman and Luuk Cummins, who have worked together since 2016, form the investment committee. They are joined by comanager Sipke Moes when discussing whether or not to exclude items based on ESG considerations.

Four additional portfolio managers round out the tight-knit group and all seven portfolio managers acts as a sector specialist, covering between 60 and 80 issuers. The managers aim to outperform their benchmark, the iBoxx Euro Corporates Index, while maintaining an emphasis on environmental, social and governance factors. The fund’s credit market sensitivity is actively managed in line with top-down market views by adjusting the fund’s cash stake, sector exposures and credit quality positioning (the fund can hold up to 10% of its assets in bonds rated BB, a relatively modest high-yield allowance compared to many category peers). The fund’s approximate eighteen-month track record is encouraging thus far; it beat its benchmark in 2021 and 2022.

MyMap 3 D, MyMap 4 D, MyMap 5 D, MyMap 6 D – Silver

Tom Mills

MyMap is a risk-targeted range that combines low-cost index investing with active asset allocation and a robust risk management framework. Our positive view on the Process, combined with very low ongoing charges, results in a Morningstar Analyst Rating of Silver for the clean D share classes, while the most expensive share class is rated Bronze. The MyMap strategy targets levels of risk (volatility) rather than asset-class weights, with funds ranging from lowest (3) to highest (6) risk. Each fund in the range has a five-year annualised volatility target. The strategy follows a fundamentals-driven systematic approach that favours attractively priced asset classes but also incorporates insights such as earnings momentum and sentiment.

The portfolio is typically rebalanced three to four times a year, with views implemented through passive iShares funds. This predominantly quant strategy benefits from BlackRock’s Model Portfolio Solutions expertise, but the lead manager’s limited experience in a lead role keeps the People Pillar rating at Average. Rafael Iborra has end responsibility for the performance and leads the team’s research efforts in London. He has leeway to follow or override the model, using discretion and collaborating with his comanagers, Christopher Ellis Thomas and Claire Gallagher, who have shorter tenures on the funds. Other areas in BlackRock such as risk and technology provide valuable support.

PIMCO GIS Global Investment Grade Credit ESG Ins – Bronze

Jeana Marie Doubell

Pimco GIS Global Investment Grade Credit ESG benefits from the skill of its veteran lead manager, strong comanager support, and the backing of an impressive group of corporate bond specialists, along with a versatile process that draws on the firm's robust macroeconomic and fundamental research – earning it a High people score and an Above Average process core. The clean Institutional share classes earn Morningstar Analyst Ratings of Bronze, while its more-expensive shares earn a mix of Neutral and Negative ratings. Lead manager Mark Kiesel boasts two decades of experience.

He has run this fund since its inception in October 2018, supported by comanagers Mohit Mittal and Jelle Brons, and has also managed Pimco’s flagship global corporates strategy, Pimco GIS Global Investment Grade Credit, since July 2003. The team is further aided by an impressive cadre of corporate credit portfolio managers and analysts, as well as Pimco’s plethora of quants, traders, and macro researchers. In keeping with its sustainable investing orientation, this strategy is subject to several exclusion criteria, eliminating approximately 15% of the benchmark’s securities (the Bloomberg Global Aggregate Credit Index). The team also aims to maintain a higher average ESG score (as measured by MSCI data) than the benchmark’s average ESG score.

Upgrades

JPMorgan Income C – Bronze from Neutral

Paul Olmsted; Hunter Beaudoin

JPM Income leverages the expertise of lead manager Andrew Norelli, who has helmed the strategy since its mid-2014 inception, and comanagers Drew Headley and Tom Hauser. The managers complement each other’s respective areas of expertise while pulling from JPMorgan’s stable and vast global fixed-income resources, resulting in a People Pillar rating upgrade to Above Average from Average. The strategy’s flexible, benchmark-agnostic approach takes advantage of relative value opportunities and has delivered on its mandate to provide consistent income, and the Process Pillar rating has been upgraded to Above Average from Average. These pillar rating upgrades result in an upgrade of the Morningstar Analyst Rating for the Luxembourg-domiciled vehicle’s clean C share classes.

Matthews Asia Dividend I – Silver from Bronze

Robby Greengold, CFA; Hunter Beaudoin

Matthews Asia Dividend’s new lead managers earn an upgrade of its Morningstar Analyst Rating to Silver from Bronze for its clean Institutional share classes, while its more expensive retail share classes receive an upgrade to Bronze from Neutral. The strategy is now in the capable hands of two co-lead managers with many years of experience working alongside one another that, for more than a decade, has guided the Bronze-rated, US domiciled Matthews Asian Growth & Income to solid risk-adjusted results. Kenny Lowe steers it with Robert Horrocks, who has long been a comanager, was previously one of the strategy’s lead managers, and is the firm’s chief investment officer. Sid Bhargava and Elli Lee are now listed comanagers.

The broader investment team on which the managers rely for insights has become diminished in recent years as many analysts and portfolio managers have left and have not been fully replaced. Even so, the team remains stronger than most, and the lead managers’ experience is an advantage to the strategy. It earns an upgrade of its People rating to Above Average from Average. The strategy's investment approach is likely to become more cautious than it has been in recent years. It merits an Above Average Process rating.

Schroder ISF US S&M-Cap Equity C – Silver from Bronze

Lena Tsymbaluk

Schroder ISF US S&M-Cap Equity benefits from a stable team and an established process. Manager Bob Kaynor has run this strategy as the sole manager since April 1, 2019, when he took over from Jenny Jones. He has 29 years of fundamental research and investment experience, with a substantial portion of his career spent investing in smaller cap stocks. Kaynor is supported by a strong and experienced team, consisting of eight members. Kaynor has stayed true to the approach and his execution has resulted in downside resilience, which is the key feature of the strategy, relative to the respective indexes. The People score has been upgraded to Above Average from Average given Bob Kaynor has demonstrated he can implement the process consistently and to a good effect. As a result, the Morningstar Analyst Rating for the clean C share class has been upgraded to Silver from Bronze. The rest of the share classes range from Silver to Neutral, dependent on fees.

Schroder US Mid Cap Z – Silver from Bronze

Lena Tsymbaluk

Schroder US Mid Cap benefits from a stable team and an established process. Manager Bob Kaynor has run this strategy as the sole manager since 1st April 2019, when he took over from Jenny Jones. He has 29 years of fundamental research and investment experience, with a substantial portion of his career spent investing in smaller cap stocks.

Kaynor is supported by a strong and experienced team, consisting of eight members. Kaynor has stayed true to the approach and his execution has resulted in downside resilience, which is the key feature of the strategy, relative to the respective indexes. The People score has been upgraded to Above Average from Average given Bob Kaynor has demonstrated he can implement the process consistently and to a good effect. As a result, the Morningstar Analyst Rating for the clean Z share class has been upgraded to Silver from Bronze. The rest of the share classes range from Silver to Bronze, dependent on fees.

Schroder US Smaller Companies Z – Silver from Bronze

Lena Tsymbaluk

Schroder US Smaller Companies benefits from a stable team and an established process. Manager Bob Kaynor has run this strategy as the sole manager since April 1, 2019, when he took over from Jenny Jones. He has 29 years of fundamental research and investment experience, with a substantial portion of his career spent investing in smaller cap stocks.

Kaynor is supported by a strong and experienced team, consisting of eight members. Kaynor has stayed true to the approach and his execution has resulted in downside resilience, which is the key feature of the strategy, relative to the respective indexes. The People score has been upgraded to Above Average from Average given Bob Kaynor has demonstrated he can implement the process consistently and to a good effect. As a result, the Morningstar Analyst Rating for the clean Z share class has been upgraded to Silver from Bronze. The rest of the share classes range from Silver to Bronze, dependent on fees.

Downgrades

IShare Environmental & Low Carbon Tilt Real Estate Index – Bronze from Silver

Kenneth Lamont

IShares Environmental & Low Carbon Tilt Real Estate Index changed its benchmark to the FTSE EPRA Nareit Developed Green Low Carbon Target Index in November 2022. The new strategy uses an optimizer to reweight holdings to meet specified goals after applying basic environmental, social, and governance screens. The fund now tracks the FTSE EPRA Nareit Developed Green Low Carbon Target Index. Beginning with the FTSE EPRA/NAREIT Developed Index, the strategy applies values-based exclusions to those stocks with exposure to nonrenewable energy, tobacco, weapons, and/or other controversies before reweighting the remaining stocks to meet set percentage improvement in three sustainable metrics versus the unscreened variant of the index. These targets are a 30% improvement in green certificates, a 10% improvement in energy usage, and a 20% improvement in carbon emissions intensity.

Despite the inclusion of sector and geographic constraints, which ensure the fund retains many of its core characteristics, the lack of a live track record for the strategy means our conviction has been adjusted downward. The low fee sported by the fund and similarities between this and the previous unscreened variant of the index (which we hold in a favourable view) mean we are still confident that this fund will outperform its Morningstar Category peers on a risk-adjusted basis over a full market cycle. For these reasons, the fund's share classes have been downgraded to a Morningstar Analyst Rating of Bronze from Silver and/or Gold depending on fees.

Jupiter UK Mid Cap I – Bronze from Silver

Teodor Dilov

Jupiter UK Mid Cap continues to benefit from its long-tenured manager and a process that leads to finding companies with high growth prospects. Although we retain our positive conviction in the manager and team’s capabilities to deliver excess returns over the long-term, the People score has been downgraded to an Above Average from High due to some stocks specific issues that have negatively impacted the strategy’s longer-term track record, along with the ongoing attempts to dispose from the direct holdings in private companies. While the Process pillar score remains unchanged at Above Average, the Morningstar Analyst Rating for the clean I share class was downgraded to Bronze from Silver. Other share classes range from Bronze to Neutral depending on fees.

Jupiter UK Smaller Companies I – Silver from Gold

Teodor Dilov

Jupiter UK Smaller Companies continues to benefit from its long-tenured manager and a consistent process that leads to finding companies with strong growth prospects. While we retain our positive conviction in the manager, value added through active stock selection has declined in recent years, leading to the People score being downgraded to Above Average from High. As a result, the Morningstar Analyst Rating for the cheaper share classes, including the clean I share class, have been downgraded to Silver from Gold. More expensive share classes retain their Silver rating.

Lyxor Euro Inflation Linked ETF – Silver from Gold

Jose Garcia-Zarate

This fund remains a compelling option for investors to gain exposure to the market of euro-denominated inflation-linked government bonds. This is a market where active managers have little room to add value on a consistent basis and where the benefits of a low-cost passive approach are key. All Lyxor-branded funds are now part of the Amundi ETF line-up. The downgrade from Gold to Silver is an adjustment to better reflect the fund´s ability to deliver returns over the category average over the long-term.

Nuveen Global Clean Infrastructure Impact P – Neutral from Bronze

Thomas De fauw

Effective October 24, 2022, Nuveen changed the name of this fund to Nuveen Global Clean Infrastructure Impact from Nuveen Global Infrastructure and repositioned the strategy to incorporate a restrictive sustainable investing objective. As a result, the strategy now invests in a significantly smaller universe of infrastructure companies. Only companies in electric transmission and utilities, passenger rail, renewable energy, waste, and water utilities are currently eligible for investing, while large subsectors like gas utilities and toll roads are excluded.

This reduces the fund’s flexibility and questions the strategy’s ability to deliver the same level of alpha as with the original offering. Combined with the team’s traditional high-turnover approach, we are downgrading the Process Pillar to Below Average while keeping the People pillar score at Above Average, leading to a Morningstar Analyst Rating of Neutral for cheaper share classes, while the more expensive share classes are downgraded to Neutral from Bronze.

Rerated from Under Review

BGF United Kingdom D – Neutral from Under Review

BlackRock UK D – Neutral from Under Review

Teodor Dilov

Following the unexpected departure of Nick Little, who led on this strategy from 2012, his colleague from the UK emerging companies team Roland Arnold will manage the strategy going forward. Arnold is also a lead on the UK Smaller Companies and UK Special Situations strategies, where we rate the People pillar as Above Average, but here the People score has been downgraded to Average on the basis of Arnold’s small cap specialism and lack of experience in large cap and international stocks. We don’t expect major changes to the existing process, which focuses on growth opportunities in the UK large cap space and makes a full use of the 20% off-benchmark allowance. Our concerns around the use of the risk budget remain and the Process continues to receive an Average score. The overall Morningstar Analyst Rating for the clean D share class was downgraded to Neutral from Bronze. The funds were previously placed Under Review.

PIMCO GIS Diversified Income Instl – Gold from Under Review

Eric Jacobson

PIMCO GIS Diversified Income Fund's still ample staffing, analytical resources, and proven approach merit a Morningstar Analyst Rating of Gold for its lowest priced and clean Institutional share classes along with Silver and Bronze ratings for its more costly shares. In the context of a decidedly aggressive credit mandate, the strategy benefits from a circumspect, benchmark-aware style—a crucial source of structure given its many moving parts. The strategy’s trailing returns data has been muted by its recent stumbles, but otherwise belies a history that has made it a compelling choice for global credit exposure. The fund was previously placed Under Review.

Moved to Under Review

MFS Meridian US Corporate Bond W – Under Review from Neutral

Elbie Louw

We are placing MFS’ Corporate Bond strategy Under Review following the news of comanager Henry Peabody’s departure from MFS on 20 January 2023. The firm indicated that Jay Mitchell joins as new coportfolio manager from this date. He will comanage the fund with Alex Mackey, who has been at the strategy’s helm since April 2017. Previously the ratings ranged from Neutral to Negative, depending on fees, with the clean W share class rated Neutral.

Pictet-Global Megatrend I – Under Review from Bronze

Ronald van Genderen, CFA

We are placing Pictet-Global Megatrend Selection Under Review following Pictet's announcement on several changes within its comprehensive thematic equities team, including four departures. These changes affect six of the 12 strategies in which Pictet-Global Megatrend Selection invests and took effect as of January 2023. Previously the ratings ranged from Bronze for the strategy's cheapest share classes to Neutral for the most expensive ones, with the clean I share class rated Bronze.