Morningstar Fund Ratings: the Monthly Update

We initiate coverage of abrdn European Sustainable Equity with a People and Process Pillar ratings of Average, leading to the Morningstar Medalist Rating of Neutral for its SGD share class. The strategy is managed by a three-member portfolio construction group led by Ben Ritchie. With over 15 years of average industry and firm tenure, the team brings stability and experience. Ritchie has over two decades of experience in European and U.K. equities and a successful track record managing the Europe-ex U.K. and U.K. investment trust. In 2022, the equity team underwent restructuring and merged its five regional teams into a new, larger team of 45 members. As a result, some former members were reassigned or left the firm, and the benefits of the new setup are yet to be seen. The team uses a bottom-up, convictiondriven approach, focusing on company quality, balance sheet strength, and positive ESG factors. The approach results in a focused portfolio of 25-40 high-quality stocks with a high active share above 80% and annual turnover between 20-50%. Upon taking control in September 2015, Ritchie refined the approach, resulting in a more high-quality, conviction-led portfolio with growth biases. While the changes appear logical and promising, ongoing consistency with this approach remains a watchpoint.

Amundi Emerging Markets Equity Focus R2 EUR – Neutral

Harsh Jain

A thoughtfully applied risk-aware approach in the volatile EM space that needs to be observed for longer to gain higher conviction. The risk-aware blend style approach has been applied consistently for a fairly long period and the experience and stability of the lead manager Mickael Tricot, and the 5-member portfolio management team is a positive for this fund. The process, a combination of top down allocation as well as stock selection, has been well executed in a risk-cognizant manner with strong downside protection. While the tight risk controls here are appreciable, they can reduce the alpha potential, especially in the competitive emerging-markets space which sees high return dispersion. This factor and an element of subjectivity in portfolio construction result in a need to observe this strategy for longer to gain a stronger conviction. Overall, the People and Process Pillars are assigned Above Average and Average ratings, respectively.

Eastspring Investments Asian Dynamic A – Neutral

Hunter Beaudoin

Eastspring Asian Dynamic is helmed by Sundeep Bihani, who took over as lead manager in October 2023 following the untimely death of predecessor and industry veteran Andrew Cormie. Bihani has about 20 years of industry experience and 15 years of tenure at Eastspring, but he has only managed money since mid-2020. We are cautious of his readiness as lead manager here, especially since this strategy is higher-octane than the other mandates under his management, which leaves less room for error. Thin and unstable direct-support resourcing further lowers our conviction. Although the process is clearly defined, we are apprehensive of the new manager’s ability to identify value traps and execute the process successfully. As a result, the strategy earns a People rating of Below Average and a Process rating of Average.

Janus Henderson UK Responsible Income I Inc – Bronze

Daniel Nilsson

We initiate coverage of the Janus Henderson UK Responsible Income Fund, with the People Pillar rated as Above Average and the Process Pillar rated as Average. We have a positive opinion on lead manager Andrew Jones, who is well supported by deputy manager David Smith. Jones has been the lead portfolio manager for the strategy since January 2012 and benefits from the vast resources at the firm, which includes the twelve strong Global Equity Income team. The strategy follows a bottom-up oriented process, and the focus is on looking for companies in a strong financial position with plenty of cash flow, allowing them to reinvest for future growth, whilst at the same time rewarding shareholders with rising dividends. Valuation is integral to the process and a range of valuation techniques are applied to each company that makes it through to the valuation screen.

The fund implements a strict ethical screen and does not invest across areas such as oil and gas, mining, tobacco, alcohol, aerospace, and defense. As a result, the composition of the fund is quite different to the peer group given a lot of these areas are high dividend paying industries. The process has been consistently implemented over many years and has had a strong performance profile, with sizeable outperformance over the benchmark and peer group since Andrew Jones took over as lead portfolio manager in January 2012. As a result, the strategy’s clean I share class earns a Morningstar Medalist Rating of Bronze, with more expensive share classes rated Neutral.

JPM UK Equity Core E Net Inc - Bronze

Daniel Nilsson

We initiate coverage of the JPM UK Equity Core strategy with the People pillar rated as Above Average and the Process pillar rated as Average. We have a positive opinion on the portfolio management team led by James Illsley, who is well supported by Chris Lleyelyn, Callum Abbot and Zach Chadwick, all portfolio managers on the strategy. Illsley has been the lead portfolio manager for the strategy since July 2013 and benefits from the vast resources at the firm, which includes the JPMorgan International equity group.

The strategy is benchmark aware and to achieve this, takes small overweight positions in quality businesses that are attractively valued and whose outlook is promising, whilst also taking small underweight positions in stocks not meeting these characteristics. From a style perspective the objective is to understand whether a company has attractive value, quality and or momentum characteristics. The fund has stock and sector limits of 30bps relative to the index to ensure that a core exposure to the index is retained, whilst giving the investment team some sort of flexibility to outperform the index. As such, at a stock and sector level, weightings will be closely aligned to the fund’s benchmark. The process has been consistently implemented over many years and has had a strong performance profile, with outperformance over the FTSE All Share Index, peer group and Morningstar UK All Cap TME index since James Illsley took over as lead portfolio manager in July 2013 through 30th November 2023. As a result, the strategy’s clean E share class earns a Morningstar Medalist Rating of Bronze.

Upgrades

Artisan Global Value I USD Acc – Gold from Silver

Andrew Daniels

A topnotch manager is at the helm here. Dan O'Keefe has led this global equity offering since its December 2007 inception. He joined Artisan Partners in 2002 after spending five years at Harris Associates, primarily supporting the accomplished David Herro on Oakmark International OANIX and Oakmark International Small Cap OANEX. He has posted superb returns throughout his 30-year career but more importantly continues to demonstrate a passion for investing, remains more closely involved in individual stock research than most managers, and is heavily invested here alongside fundholders. Overall, the team's effective balancing of valuation and quality, along with an independent-minded and disciplined approach, earn the strategy a High Process rating. Increased conviction in this strategy’s investment team merits a People rating upgrade to High from Above Average, resulting in a Morningstar Medalist Rating upgrade to Gold from Silver.

Fidelity European W Acc – Gold from Silver

Francesco Paganelli, CFA

Fidelity European’s experienced lead manager, Sam Morse, has diligently applied the strategy’s wellthought-out process during his tenure, helping the strategy to outperform on the downside on a consistent basis, thus providing a platform for long-term success. The exceptional execution of this patient, balanced, and differentiated approach leads to an upgrade of the Process Pillar rating to High from Above Average. While company research lies at the heart of the approach in typical Fidelity style, the managers also employ a distinctive and rigorous stock-selection filter to construct the portfolio, with dividend growth representing the most important characteristic they look for in companies. With an upgraded Process Pillar rating, the fund’s clean W share class earns a Morningstar Medalist Rating upgrade to Gold from Silver.

Man GLG Japan Core Alpha Equity I USD – Bronze from Neutral

Daniel Nilsson

Since Jeff Atherton took over as lead portfolio manager in January 2021, he has made some important process enhancements that have been applied to good effect. There is now a greater appreciation of catalysts that help drive rerating, including metrics such as return on equity and earnings quality, as well as corporate governance changes. We see this as a well-reasoned evolution, without affecting the contrarian, deep-value philosophy that has long differentiated the fund from peers. Atherton now runs a portfolio that truly reflects his investment convictions, with smaller position sizes and a more diversified portfolio, hallmarks of his approach.

We have also seen sensible portfolio activity across 2022 and 2023 under the leadership of Atherton, whilst performance has continued to meet expectations during the reversal in the value vs growth dynamics within Japanese equities. As such, given our continued confidence in lead PM Jeff Atherton and our increased conviction in recently promoted portfolio managers Stephen Harget and Emily Badger, the People Pillar rating has been upgraded to Above Average, from Average.

MFS Meridian Prudent Capital W1 USD – Gold from Silver

Francesco Paganelli, CFA

The strategy’s architect, Barnaby Wiener, is set to retire on April 30, 2024, after a long and successful career at MFS. While his gradual transition was well-planned and managed effectively, we think this is ultimately a net loss for the team and the investors in the strategy. Wiener’s long industry experience, deep market knowledge, and strong stock-picking skills will be missed. Going forward, the strategy will be led by Edward Dearing, Shanti Das-Wermes, and David Cole.

The management team retains strong credentials, but the team dynamic is less proven, and the most recent addition, Das-Wermes, has short experience in running globally diversified portfolios. As a result, we are lowering the People Pillar rating to Above Average from High. Given the broad portfolio overlap with its Prudent Wealth fund sibling and our increased confidence in the firm's fixed-income capabilities, we have upgraded the strategy Process Pillar rating to High from Above Average. We expect the strategy’s distinctive investment philosophy to remain intact after Wiener’s departure; its key strengths include the multilayered risk-management policy and a repeatable stock-picking approach playing to the group’s strengths. All in all, the strategy remains a strong offering for investors seeking risk-conscious exposure to global stocks. As the strategy’s Parent rating was also increased to High from Above Average, the fund’s clean W1 share class earns a Morningstar Medalist Rating of Gold.

Schroder ISF EURO Equity C Acc EUR – Silver from Bronze

Michael Born

Schroder ISF Euro continues to benefit from a well experienced lead manager and large analyst team, as well as a stable process which aims to get the most of the analysts. Lead manager Martin Skanberg has 29 years’ experience and has been in place here since 2006. He is supported by a team of 12 with an average of 16 years experience and although there has been some turnover in previous years, the last few years have brought stability. Whilst recent returns have suffered as a result of a significant mid-cap bias, this has been where many of the best ideas have been found over time. Whilst we maintained People and Process Pillars at Above Average, changes in the competitive landscape within the Morningstar Eurozone Large-cap Equity category have resulted in an upgrade of the Morningstar Medalist Rating to Silver from Bronze for the clean C acc share class.

Downgrades

DWS Top Dividende FD – Neutral from Bronze

Jeffrey Schumacher, CFA

The strategy combines a well-thought-out, conservative, and long-term-oriented investment approach with careful stock selection and sensible portfolio construction, but its massive EUR 21.1 billion asset base per September 2023 appears to hinder optimal execution. We are therefore lowering our Process Pillar rating from Above Average to Average. While we have no immediate concerns about portfolio liquidity given the orientation to large-caps, improved name diversification, limited inflows since 2016, and a structural allocation of ~8% to cash and government bonds, we have become less confident in the managers’ ability to position and maneuver the portfolio, which can reduce the effectiveness of the approach.

The team has observed declining liquidity in the European market, making it more difficult to build larger positions in a region important to dividend investors and where the team's stock selection has been most successful in the past. Consequently, there are currently more smaller positions in the fund than the managers like, and it has become more challenging for a strategy of this size to capitalize on market opportunities. While the strategy's edge doesn’t lie in its ability to act quickly, its lack of maneuverability to respond to opportunities could undermine effective implementation. Our conviction in the team remains despite elevated turnover, driven by the presence of dividend veteran Thomas Schussler, earning the strategy an Above Average People Pillar rating.

MFS Meridian Prudent Wealth W1 USD Silver from Gold

Francesco Paganelli, CFA

The strategy’s architect, Barnaby Wiener, is set to retire on April 30, 2024, after a long and successful career at MFS. While his gradual transition was well-planned and managed effectively, we think this is ultimately a net loss for the team and the investors in the strategy. Wiener’s long industry experience, deep market knowledge, and strong stock-picking skills will be missed. Going forward, the strategy will be led by Edward Dearing, Shanti Das-Wermes, and David Cole.

The management team retains strong credentials, but the team dynamic is less proven, and the most recent addition, Das-Wermes, has short experience in running globally diversified portfolios. As a result, we are lowering the People Pillar rating to Above Average from High. We expect the strategy’s distinctive investment philosophy to remain intact after Wiener’s departure. The multilayered risk-management policy and repeatable stock-picking approach playing to the group’s strengths continue to earn the fund a High Process Pillar rating. All in all, the strategy remains a strong offering for investors seeking risk-conscious exposure to global stocks, though the remaining managers have big shoes to fill. As a result, the fund’s clean W1 share class Morningstar Medalist Rating is downgraded to Silver from Gold.

Rerated from Under Review

Artemis Strategic Bond I Quarterly Acc – Neutral from Under Review

Evangelia Gkeka

Juan Valenzuela, lead manager here since September 2021, specializing in rates and macro, and Rebecca Young, support manager since December 2021, coordinating credit selection are no longer managing the fund. Valenzuela will stay at the firm until year-end to provide assistance during the handover process to the new team, and Young has left the firm. From November 1st, 2023 the fund will have three portfolio managers. David Ennett, who joined Artemis in February 2019 from Kames and is currently also head of high yield and comanager of Artemis High Income Fund since September 2021 will be responsible for the high yield part of the portfolio. Grace Le will be responsible for the investment grade part of the portfolio. She joined Artemis in December 2019 from Kames, where she comanaged a range of investment grade bond funds. Since 2020 Le is comanaging the Artemis Corporate Bond Fund.

Liam O’Donnell, an experienced rates and macro specialist joined from Abrdn, where he was comanaging the Strategic Bond Fund from August 2016 among other funds until leaving the firm to join Artemis. O’Donnell is a direct replacement for Valenzuela given his focus is on rates and macro. Given the changes at the helm of the fund we need to build our conviction in the new team’s ability to successfully execute this flexible and unconstrained process. This is the second new leadership team within two years for the strategy. As a result, we have downgraded the People Pillar rating to Average from Above Average while maintaining the Process Pillar rating at Average. The strategy was previously placed Under Review.

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

Michael Born

Following our formal review of the Jupiter UK Mid Cap fund, both the Process and People pillars have been downgraded from Above Average to Average. We recently put the strategy Under Review following the news that lead manager Richard Watts would depart Jupiter in 2024 to focus on managing the Chrysalis investment trust. His replacement, Tim Service, has been a long-standing team member and manages the UK Specialist hedge fund, however, the bulk of his assets have been focused on the long / short space (albeit with a long-only mandate) and so there are uncertainties as to how well the track record will carry over.

Service is expected to have a more risk-aware approach, with more conservative positioning overall and lower position sizes at the top end, and although they sound like sensible moves, given the performance struggles over 2021 and 2022, there are clear uncertainties here which requires time to evaluate. Moreover, much of our conviction was tied to the experience and judgement of Watts. As a result of these pillar downgrades, the overall Morningstar Medalist Rating is downgraded from Bronze to Neutral for the clean I acc share class. The strategy was previously placed Under Review.

Moved to Under Review

Matthews Pacific Tiger A USD Acc – Under Review from Bronze

William Samuel Rocco

Matthews International Capital Management has announced that Sharat Shroff gave up his manager role on Matthews Pacific Tiger effective December 19, 2023, after serving as the lead manager or a co-lead manager for roughly 16 years. Shroff, who also relinquished his manager role on Matthews India MINDX, will leave the firm at the end of 2023. InBok Song remains in place as a co-lead manager on this strategy and Andrew Mattock and Winnie Chwang remain in place as comanagers.

Meanwhile, Sean Taylor, who joined the firm a couple of months ago and who will officially take over as Matthews' chief investment officer on January 1, 2024, has been named as a co-lead manager on Matthews Pacific Tiger and as a comanager on Matthews Emerging Markets Equity MEGMX. Peeyush Mittal, who serves as the lead manager of Matthews India, has been added as a comanager on Matthews Pacific Tiger. And Jeremy Sutch, who serves as a comanager on Matthews Emerging Markets Small Companies MSMLX, has been named as a comanager on Matthews Pacific Tiger and Matthews Emerging Markets Equity. That's an exceptional amount of personnel change, and this strategy's restructured team could lead to modest or even significant modifications to its process or portfolio. Consequently, this strategy has been put under review.