New Ratings
BGF ESG Multi-Asset – Neutral
Matias Möttölä
We have initiated coverage on the BGF ESG Multi-Asset fund from BlackRock with a Morningstar Analyst Rating of Neutral for its clean share classes. The fund was transformed into an ESG offering in March 2019. Within equities, a combination of industry exclusions amd screens based on MSCI’s ESG ratings lead to a best-in-class portfolio which tends to have a slight quality tilt. Bolstering the fund’s ESG credentials are also a list of impact investments such as social housing and renewables. Although we think the biases resulting from the ESG investments have been kept well in control so far, we think it’s still early to gain conviction in the renewed process. Same goes for the two portfolio managers Jason Byrom and Colin McKenzie who are backed by a solid team and have access to vast resources within the organization, but took over the fund only in May 2018.
H2O Allegro – Negative
Matias Möttölä
We have switched our coverage of the H2O Allegro strategy to this fund, which is initiated at a Morningstar Analyst Rating of Negative. In August 2020, H2O suspended eight funds, including Allegro, at the request of the French regulator AMF in order to “side-pocket” illiquid assets in the funds. In October this FCP fund was incepted to implement H2O’s macro strategy, while a fund called H2O Allegro SP now holds the illiquid assets and derivatives linked to them. We continue to have serious concerns about risk management and stewardship at H2O, which communicated on 6 November that is parting ways with its 50.01% majority owner Natixis.
Upgrades
Stewart Inv Indian Subcontinent Sustainability – Gold from Silver
Samuel Lo
Sashi Reddy has been involved with the Stewart Investors Indian Subcontinent Sustainability strategy since December 2009 and took over as lead manager in August 2012. Reddy is a topnotch investor who has consistently demonstrated strong investment acumen and a passion for investing over the years. In addition to his role here, Reddy has also been leading the Worldwide Leaders strategy since 2016 and comanaging the Asia Pacific Sustainability and Asia Pacific Leaders strategies since 2013 and 2016, respectively.
We have been monitoring Reddy’s workload and have gained more comfort over time as he continued to demonstrate commitment to and mastery of the Indian portfolio. Reddy employs a bottom-up, benchmark-agnostic approach that looks for 30-40 high-quality companies with sustainable and predictable businesses, with a laser-focus on management quality. Overall, increased confidence in Reddy, alongside an already strong and stable supporting cast of 11 within the Sustainable Funds Group of Stewart Investors, drove the People rating to High from Above Average. As a result, we have upgraded the Morningstar Analyst Rating to Gold from Silver on this strategy’s B clean share classes, while its more expensive A retail share classes were upgraded to Silver from Bronze.
AQR Global Risk Parity – Bronze from Neutral
Matias Möttölä
The Morningstar Analyst Rating of all share classes of AQR Global Risk Parity have been upgraded to Bronze from a previous Neutral rating. Our view of the investment process has improved, as AQR has continued to make small adjustments in particular to the way volatility is modeled. This may help to reduce the risk of large drawdowns, which were an issue for this fund in its early years. We continue to appreciate the strength and breadth of the team managing risk parity portfolios at AQR, despite the departure of one of the portfolio managers, Brian Hurst, from the company.
Downgrades
T. Rowe Price Emerging Markets Equity – Silver from Gold
Mathieu Caquineau
T. Rowe Price Emerging Markets Equity's experienced skipper Gonzalo Pangaro will retire in January 2022. His investment acumen will be missed, and we have reduced the strategy's People rating to Above Average from High. But investors have reasons to stay put. The strategy will be progressively handed over to a promising duo. Eric Moffett will be appointed comanager in April 2021 and will eventually lead the strategy. Moffett has 20 years of experience and has good credentials for the job, having managed T. Rowe Price Asia Opportunities since 2014 with great results. Malik Asif, who is currently associate fund manager, will remain as comanager.
A large part of Asif's 12 years of experience is in emerging markets outside Asia. The duo will be supported by the firm's huge research capabilities in emerging markets. Another comforting factor is that Moffett's own approach is similar to Pangaro's. Hence, we don't expect changes to this well-established, growth-oriented process. With the Process rating remaining at Above Average, the fund sees its Morningstar Analyst Rating lowered to Silver from Gold for the institutional share class. The more expensive clean share class Q and retail A shares earn ratings that are one notch lower at Bronze and Neutral, respectively.
FSSA China A Shares – Bronze from Silver
Chloe Qu
We were notified in October 2020 that Quanqiang Xian, who brought 22 years of investment experience and had successfully managed the FSSA China A Share strategy since its October 2009 inception, stepped down from his portfolio management responsibilities in May 2020 and subsequently left the firm in September 2020. Replacing Xian is Winston Ke, who has 16 years of industry experience but only five years of experience in running money. Ke is less experienced and has to build his own track record at this mandate. As such, we have downgraded the People Pillar rating to Average from Above Average. Reassuringly, Ke intends to use the same quality-focused investment approach that has proved to be successful across a number of FSSA China equities portfolios, at the same time bringing a higher degree of consistency in terms of implementation by making the portfolio more aligned with other successful China equities mandates run by the team. Reflecting our reduced conviction in the incoming lead portfolio manager, the Morningstar Analyst Rating of the vehicle’s VI clean share class was downgraded by one notch to Bronze from Silver. The strategy was previously placed Under Review.
Pimco StocksPLUS™ – Bronze from Silver
Samiya Jmili
This strategy is run by seasoned lead manager Mohsen Fahmi and co-managers Jing Yang and Bryan Tsu. The team leverages Pimco’s vast bond-investing resources and derivatives-trading capabilities to offer this 2-for-1 fund, which seeks to track the performance of the S&P 500 using derivatives and generate additional returns from an actively managed ultrashort bond sleeve. The latter is structured to have a low correlation with equities and provide diversification. The limitations stemming from balancing-out this complex process can hamper the team’s ability to add alpha, though. Thus, we have downgraded the fund’s Process rating to Average from Above average. As a result, the Morningstar Analyst Ratings of its cheapest shares have been downgraded from Silver to Bronze, while the more expensive shares are now earning Neutral ratings.
NN (L) Global Sustainable Equity – Neutral from Bronze
Ronald Van Genderen
In September 2020, Neuberger Berman lifted a large part of the team managing this strategy. Lead manager Hendrik-Jan Boer, his two comanagers, and four out of the seven dedicated analysts left NN IP. NN IP has installed an interim team, but we think it members are less experienced in managing a global sustainable equity strategy. Although the philosophy and process remain intact, the interim team’s approach to portfolio construction will slightly change. First, the team will trim some positions with recent strong performance that has brought their active weight to the upper limit of desired levels.
The proceeds will be used to initiate new positions, which will increase the number of holdings. Going forward, the team will shy away from less liquid positions or taking large ownership stakes. The fund was placed Under Review after the announced team changes in September 2020. The reinstated Morningstar Analyst Ratings land at Neutral for the clean share classes, downgraded from Bronze. Other share classes are rated Neutral or Negative.
NN Duurzaam Aandelen Fonds – Neutral from Bronze
Ronald Van Genderen
In September 2020, Neuberger Berman lifted a large part of the team managing this strategy. Lead manager Hendrik-Jan Boer, his two comanagers, and four out of the seven dedicated analysts left NN IP. NN IP has installed an interim team, but we think its members are less experienced in managing a global sustainable equity strategy. Although the philosophy and process remain intact, the interim team’s approach to portfolio construction will slightly change. First, the team will trim some positions with recent strong performance that has brought their active weight to the upper limit of desired levels. The proceeds will be used to initiate new positions, which will increase the number of holdings. Going forward, the team will shy away from less liquid positions or taking large ownership stakes. The fund was placed Under Review after the announced team changes in September 2020. The reinstated Morningstar Analyst Ratings land at Neutral across all share classes, downgraded from Bronze.
Note: Under Morningstar's ratings methodology, different share classes of a fund may have a different rating
