Morningstar Fund Ratings: The Final 2023 Update

We initiate coverage on M&G Japan with Above Average People and Average Process Pillars. Carl Vine leads the strategy, having joined M&G in 2019 as co-Head of Asia Pacific equities. Both Vine and deputy manager David Perrett join from Port Meadow Capital Management, a pan-Asian long-short equity focused hedge fund they founded in 2014. Almost the entirety of their experience has been in the pan[1]Asian long/short space, and so this Japan long-only mandate represents something of a change in tack. However, their amassed research catalogue and experience remain advantageous here. The distinctive process has elements of intangibility, therefore limiting conviction during its infancy as a standalone, long-only proposition. Since Vine took the reins at the beginning of October 2019 to 31st October 2023, performance has been impressive, returning 7.5% annualized vs 2.8% and 2.4% for the Morningstar Japan TME index and the Morningstar Japan large-cap peer group, respectively. Given the fund is relatively unconstrained in nature with an element of benchmark awareness, we hope the strategy can deliver consistent rolling periods of outperformance going forward.

Manulife GF Sustainable Asia Equity I – Bronze

Hunter Beaudoin

We initiate coverage of Manulife GF Sustainable Asia Equity with a People rating of Average and a Process rating of Above Average, resulting in a Morningstar Medalist Rating of Bronze for its I share classes and Neutral for its AA share class. Lead manager Kenglin Tan sports 23 years of investment experience and has helmed this strategy since April 2016. Although she has demonstrated deep knowledge of her portfolios at our review meetings, we have concerns regarding her workload. She manages seven other mandates investing in the Asia Pacific region and has absorbed substantial stock coverage following a key analyst departure in mid-2022. The growth-at-a-reasonable-price, bottom-up investment process is well-structured, and Tan invests with conviction. Indeed, the 40-50 holding portfolio has been more active than peers and has sported a tilt toward smaller-cap stocks as Tan hunts down the market cap spectrum. The strategy was repurposed to a sustainable mandate and classified as Article 8 under EU SFDR in July 2022, but there was minimal effect on the portfolio due to the investment framework’s existing inclusion of ESG factors and Tan’s focus on management quality in stock selection. The clearly defined approach and Tan’s diligent application of the framework provide the strategy an edge.

Polar Capital European Ex UK Income I Acc – Silver

Jack Fletcher-Price

 We initiate coverage on Polar Capital European ex UK Income with Above Average People and Process Pillars. Lead manager Nick Davis has proven himself a stoic practitioner of the strategy he architected, characterized by its uncompromising approach to quality, value, and income. Davis’ unique pedigree, having worked alongside highly regarded quality and contrarian managers alike at his previous shop, feeds conviction here. The smaller team doesn’t quell our conviction, given this is the only strategy they work on. Maintaining competition for capital within the portfolio is deemed imperative, and as such the portfolio resembles a higher conviction collection of names than many value oriented peers. An outcome of the quality focus and longer-term mindset is the atypical sector exposure compared to income peers; utilities, energy, and banks all feature less. Investors can therefore expect the returns profile to be differentiated from quality and value peers alike, and while there is the potential to be left behind in frothy markets, they should continue to be rewarded with stronger risk-adjusted returns over the cycle.

Upgrades

BlackRock Systematic Sustainable Global SmallCap D2 – Bronze from Neutral

Ramanand Kothari

The BGF Global SmallCap strategy benefits from the firm's strong leadership and extensive resources. The consistent application of its alpha-driven quantitative stock selection process in recent years has upgraded its People and Process Pillar ratings to Above Average and Average from Average and Below Average, respectively. The Systematic Active Equity team at BlackRock, managing the strategy since May 2017, is led by co-managers Kevin Franklin, Raffaele Savi, and Richard Mathieson, providing technical leadership and stability. Despite its large size, the team, comprising 90 professionals skilled in data analytics, natural language processing, and machine learning, has maintained commendable stability. The strategy's unique quantitative process, combining traditional and nonstandard signals like machine learning, has stabilized and consistently delivered results. While global equities are a relatively new foray, the strategy's performance has notably improved under their leadership, earning a Morningstar Medalist Rating of Bronze for its clean D share class, up from Neutral.

iShares ESG Overseas Corporate Bond Index (UK) D Acc – Bronze from Neutral

Jose Garcia Zarate

This fund is marketed for UK-based investors as a complement to domestic corporate bond exposure. The fund tracks an index that provides exposure to the global market of corporate bonds but excludes those denominated in UK Pound. The fund switched from mainstream to ESG in 2022. Its low cost is the key positive factor and the reason why this strategy may offer returns above the category average over the long-run. This has translated into a Morningstar Medalist Rating of Bronze at this review.

iShares EURO STOXX Mid ETF EUR Dist – Bronze from Neutral

Kenneth Lamont

Despite being classified as a mid-cap fund, this exchange-traded fund has two thirds of exposure to large caps and, as such, is not a rounded and representative investment proposition for those seeking pure passive exposure to the mid-cap segment. The fund holds stocks taken from the middle section of a universe dominated by large caps, which results in significant large-cap exposure. It's strong bias toward large caps means investors looking for eurozone mid-cap exposure may be better served elsewhere. However, the fund's diversification and relatively low fee remain strengths.

iShares Global Corp Bond ETF USD Dist – Bronze from Neutral

Jose Garcia Zarate

This passive fund useful instrument to gain broad exposure to the global market of corporate bonds issued from developed countries. This remains a market exposure where experienced active management can have an edge. However, investors seeking an efficiently managed and low-cost passive strategy for this bond market exposure will find this ETF fits the bill. Its low cost underpins its Morningstar Medalist Rating of Bronze at this review.

Janus Henderson Horizon Japanese Smaller Companies H2 USD – Bronze from Neutral

Ronald van Genderen, CFA

Janus Henderson Horizon Japan Smaller Companies has been in the strong hands of Yunyoung Lee since his arrival at Janus Henderson in May 2005. He is one of the longest-tenured managers in the Japan small/mid-cap equity Morningstar Category and boasts almost three decades of experience, of which the largest part has been geared toward this space. He is an asset to this strategy, and we hold him in high regard. He stands out in terms of experience and tenure on this strategy, but most importantly, his capabilities have proved to provide this strategy with an edge. The well-experienced Yusuke Suzuki supports Lee as a dedicated analyst since July 2016. This keeps the team size very compact, and it remains clear that Lee is the sole decision-maker. Therefore, key-person risk and lightly staffed support are issues that still lurk. Despite these reservations we have increased our conviction in Lee, which drives an increase of the People Pillar rating to Above Average from Average. Meanwhile, the Process Pillar rating is maintained at Average. This leads to an upgrade of the Morningstar Medalist Rating to Bronze from Neutral for the cheaper share classes, including the clean H share classes. More expensive ones retain their Neutral rating.

Moneta Multi Caps RD – Gold from Silver

Mathieu Caquineau

Moneta Multi Caps benefits from the strong investment expertise of its lead manager, Romain Burnand. He has been instrumental in building the strategy’s outstanding long-term track record since 2006. As the firm’s co-founder, Burnand has also fostered a culture of analytical excellence and meritocracy at Moneta Asset Management. Moneta’s research team is well-resourced and has in-depth knowledge of the French equity universe. The investment process has been expertly executed over time. This high[1]conviction and valuation-sensitive approach allows investments in all market caps with a strong focus on bottom-up stock selection rooted in fundamental research. The overweighting in small and mid-caps has hurt the fund recently but the long-term record remains very favorable, and the strategy has still plenty of merits for patient investors. We reiterate the strategy’s High People and Process ratings. Nevertheless, changes in the competitive landscape within the Morningstar Category have resulted in the upgrade of the Morningstar Medalist Rating to Gold from Silver for the RD share class. More expensive share classes obtain a Silver rating.

Nordea 1 – European High Yield Bond BC EUR – Bronze from Neutral

Thomas DeFauw

This fund earns its spot among our favorites in the peer group. While the team’s market insights and strong credit selection skills have long been apparent, our conviction in the process was previously held in check by concerns that its portfolio risk analysis tools, particularly for liquidity analysis, did not seem to be in line with industry peers. These have improved in recent years, however. As a result, we’ve upgraded the strategy’s Process Pillar rating to Above Average from Average. Despite a recent manager departure, the team behind this strategy remains topnotch. The cohesive portfolio manager team of four believes in decisions by consensus. Of the managers, Sandro Näf and Torben Skødeberg have steered this fund since its inception in 2002. The managers are further supported by a strong and sizable team dedicated to leveraged finance, including a team of 23 credit analysts. The People Pillar rating remains at High.

Templeton Asian Smaller Companies W Acc USD – Silver from Bronze

Claire Liang

Templeton Asian Smaller Companies is in good hands with Vikas Chiranewal, who is a veteran small-cap investor with 19 years of investment experience. He had been doing the heavy lifting on this strategy since its inception and has been serving as the de facto lead manager here since October 2015. He has been joined by comanager Krzysztof Musialik since 2018, though Musialik has been dedicating half of his time to Templeton Eastern Europe since August 2021. Nonetheless, Chiranewal’s expertise, dedication, and investment savvy instill our confidence. Meanwhile, we have gained conviction in the managers’ execution of their quality-focused investment process, which homes in on well-managed companies with durable earnings power. The duo also pays great attention to a company’s financial strength and corporate governance to minimize idiosyncratic risks, which we think is essential in investing in small caps. With an upgraded Process rating to Above Average from Average, the fund’s clean W share classes earn an upgrade to Silver from Bronze.

Templeton Emerging Markets Smaller Companies W Acc USD – Bronze from Neutral

Claire Liang

Templeton Emerging Markets Smaller Companies is in good hands of Vikas Chiranewal, who is a veteran small-cap investor with 19 years of investment experience. He had been doing the heavy lifting on this strategy since its inception and has been serving as the de facto lead manager here since October 2015. He has been joined by comanager Krzysztof Musialik since 2018, though Musialik has been dedicating half of his time to Templeton Eastern Europe since August 2021. Nonetheless, Chiranewal’s expertise, dedication, and investment savvy instill our confidence. Meanwhile, we have gained conviction in the managers’ execution of their quality-focused investment process, which homes in on well-managed companies with durable earnings power. The duo also pays great attention to a company’s financial strength and corporate governance to minimize idiosyncratic risks, which we think is essential in investing in small caps. With an upgraded Process rating to Above Average from Average, the fund’s clean W share classes earn an upgrade to Bronze from Neutral.

Downgrades

AXA Framlington UK Select Opportunities Z Acc – Neutral from Bronze

Michael Born

Following our formal review of the AXA Framlington UK Select Opportunities fund, the Process pillar was downgraded from Above Average to Average. We have concerns over the recent implementation of the process, specifically with issues around valuation and sell discipline leading the portfolio to hold a lot of aggressive growth stocks which have hurt performance since 2022. Whilst there is clearly evidence of long-term alpha generation in the small and mid-cap space, and their style has been a significant headwind, we have seen a number of stock specific mistakes, as well as a few illiquid positions which couldn’t be sold when the tide turned. The overall Morningstar Medalist Rating is downgraded from Bronze to Neutral as a result of these Pillar downgrades.

BlackRock UK Smaller Companies D – Bronze from Silver

Daniel Nilsson

Blackrock UK Smaller Companies remains a sound choice in the UK Small Cap sector, continuing to benefit from an experienced team and a time-tested investment process. Seasoned lead portfolio manager Roland Arnold has led the strategy since 2015 with strong results, albeit at times coming at a cost of higher volatility, given the strategy’s higher growth focus and positioning in cyclical areas. Nevertheless, the process has been a proven value-add over the longer term in what is a relatively inefficient area of the market. While we maintained People and Process Pillar ratings at Above Average, changes in the competitive landscape within the Morningstar UK Small Cap Category have resulted in the downgrade of the Morningstar Medalist Rating to Bronze from Silver for its clean D share class. The ratings for the other share classes range from Silver to Bronze depending on fees.

FTGF Western Asset US Core Bond PR USD Acc – Neutral from Bronze

Mike Mulach

When veteran Carl Eichstaedt retired in May 2018, the firm added named managers John Bellows and Fred Marki. They joined Western in 2011 and 2005, respectively. Julien Scholnick, who has spent 20 years at Western, has been a comanager since 2016. Ken Leech (Western's co-CIO) and Mark Lindbloom, who have comanaged the strategy since 2013 and 2006, respectively, provide continuity. Management draws on a deeply experienced and collaborative global investment-grade credit team led by industry veteran Ryan Brist. The high-yield credit team is experienced and well-staffed on paper but has a history of taking on more risk than one would expect from a high-yield mutual fund and can be more reactive rather than proactive with risk management compared to some industry leaders. The managers' thoughtful value-oriented approach and resources still stand out, but their willingness to push the strategy's limits at the expense of heightened volatility can test the purpose of a reliable core bond allocation. Western Asset Core Bond's capable management and thorough relative value approach remain a draw. Still, it can take on high volatility, so investors may be better served using this as a piece rather than a cornerstone of their fixed-income portfolio.

iShares MSCI EMU Small Cap ETF EUR Acc – Neutral from Bronze

Kenneth Lamont

Despite having a sizable mid-cap bias, the MSCI EMU Small Cap Index, with around 450 constituents, represents the most comprehensive passive exposure to eurozone small caps currently available. At 0.58%, the fund is the most expensive exchange-traded fund in the category, but the higher price tag hasn't notably affected its tracking difference (fund return minus index return) when compared with cheaper options tracking the same index. The iShares MSCI EMU Small Cap ETF's strengths lie in its fee relative to eurozone small-cap equity Morningstar Category peers, breadth of exposure, and a lack of strong actively managed alternatives. This said, the fee remains too high for a vanilla market-cap offering, and nearly identical peers are available for less.

Rathbone Global Opportunities I Acc – Bronze from Silver

Daniel Nilsson

Rathbone Global Opportunities remains a sound choice in the Global large cap growth equity sector. The strategy benefits from a highly experienced manager James Thomson, who has consistently applied his approach since 2005. While we maintained People and Process Pillar ratings at Above Average, the fund’s Morningstar category was recently changed from the Global Flex-Cap Equity category to the Global Large-Cap Growth Equity category. Subsequently, this has resulted in the downgrade of the Morningstar Medalist Rating to Bronze from Silver for its clean I share class. The ratings for the other share classes range from Silver to Bronze depending on fees.

Rathbone Multi-Asset Strategic Income Inc – Neutral from Bronze

Tom Mills

Rathbone Multi-Asset Strategic Income targets a minimum yield of 3% while aiming to deliver inflation plus 3% net of fees over a rolling five-year period, with two thirds the volatility of equities. It has tended to fall by less than peers in down markets, such as in 2018 and 2022, but has generally lagged peers when markets have risen. Its upside/downside capture versus the category index has been somewhat unfavorable, contributing to the fund underperforming both the index and peers since inception in 2015. The strategy applies a disciplined approach crafted by seasoned money manager David Coombs, although we have lessened our conviction in the ability of the process to capture sufficient total returns to compete against its Morningstar Category index, leading to a downgrade in our Process Pillar to Average from Above Average. As a result, the Morningstar Medalist Rating moves to Neutral from Bronze.

SPDR® Dow Jones Global Real Estate ESG – Neutral from Bronze

Kongkon Gogoi

In the global real estate category, SPDR Dow Jones Global Real Estate ESG ETF was a robust alternative. However, our confidence in its ability to consistently outperform peers over the long term has diminished in comparison to compelling opportunities we identify among other strategies within its peer group, particularly lower-priced passive alternatives and a number of active strategies. Despite this shift in perspective, the fund retains its status as a reasonable investment choice for investors seeking exposure to diversified global real estate.

Rerated from Under Review

Fidelity World Y-Acc-EUR – Neutral from Under Review

Fidelity Global Special Situations W Acc – Neutral from Under Review

Jack Fletcher-Price

Because of what we hope will be a short period of uncertainty, both the People and Process Pillars are set to Average. Following sole manager Jeremy Podger's announcement that he intends to step back from management here on March 31, 2024, we learned two external managers will be joining Fidelity in the new year to take the helm. Because of regulatory and contractual impediments, Fidelity is unable to announce them until early 2024. With limited details on their credentials, and seemingly material latitude upon arrival, conviction has quelled for the time being. The characteristics of the portfolio going forward are undecided to a degree. From our understanding, the incoming managers have previously run with fewer names respectively. It’s not expected that the managers will have experience running a short book either, though Fidelity is amply resourced with dedicated short analysts. The strategy was previously placed Under Review.

GAM Star Credit Opportunities (USD) Instl USD Acc – Negative from Under Review

Mara Dobrescu

Anthony Smouha and Grégoire Mivelaz have manned this fund since its inception in 2011, but Smouha had been investing in subordinate debt since the infancy of this asset class in the late 1980s. The cohesiveness and overall experience of the portfolio managers, as well as their significant personal investments in the strategy, support our conviction here, although more stability in the analyst ranks. The approach is focused on income, and portfolio turnover is typically low (below 15% per year). Historically, the managers' scrupulous attention to credit fundamentals and extension risk (the risk that a junior bond's coupon might be delayed or skipped altogether) has helped avoid many of the asset class' pitfalls. On the other hand, over the past 18 months, the team has allowed exposure to Additional Tier 1 securities to drift meaningfully from its previous internal maximum of 25% of assets. AT1 securities present unique liquidity challenges and are significantly more sensitive to credit-spread widening than other subordinated bonds—thus, we view this change with some degree of caution and will need more time to observe how the portfolio evolves under this higher-risk approach. GAM Star Credit Opportunities has appealing features through the experience of its managers, but its increased appetite for risk bears watching, resulting in a Process rating downgrade to Average from Above Average. Additionally, the fund remains too expensive to recommend. The strategy was previously placed Under Review

Moved to Under Review

Jupiter Income Trust I Acc – Under Review from Bronze

Lena Tsymbaluk

In November 2023, Jupiter announced that lead manager Ben Whitmore will be stepping down from Jupiter Income Trust around the midpoint of 2024. Taking over are Adrian Gosden and Chris Morrison, who will join in January 2024 from GAM, where they comanage GAM UK Equity Income. The duo will continue to manage the GAM fund under a subadvisory agreement until it is transferred to Jupiter's platform later in 2024, subject to customary approvals. Additionally, they will assume management of the GBP 1.5 billion Jupiter Income Trust. Before joining GAM in 2017, Gosden comanaged the Artemis UK Equity Income franchise. Morrison worked closely with Gosden during their time at GAM, having joined the company in 2011. Whitmore will continue to manage the UK Special Situations and Global Value strategies at Jupiter and is not planning to leave the group. As a result of this announcement, we have placed Jupiter Income Trust under review while we evaluate the upcoming change to the investment team.

Jupiter UK Mid Cap I GBP Acc – Under Review from Bronze

Michael Born

On November 27, 2023, Jupiter announced that Richard Watts, lead manager of the Jupiter UK Mid Cap strategy, would be departing in 2024 to set up a new firm alongside Nick Williamson, his comanager on the Chrysalis investment trust, which would concentrate on running Chrysalis. Watts departs after 21 years with the team, having been lead here since 2009. Taking over is Tim Service, who has been with the team since 2007 and has managed the Jupiter UK Specialist long/short equity fund since 2014. Service will be supported by James Gilbert, who joined the team in 2013 and has been a deputy portfolio manager since 2020. As a result of this announcement, we have placed Jupiter UK Mid Cap Under Review while we evaluate the change to the investment team.