Morningstar Fund Ratings: Weekly Round-up

In this week's ratings round-up, Morningstar analysts unveil the latest upgrades and downgrades for rated funds

Patrick Ge 7 April, 2021 | 9:10AM

morningstar rating

New Ratings

BGF China Bond – Neutral

Patrick Ge

BGF China Bond benefits from capable leadership, a large supporting cast, and a time-tested investment approach. However, its enormous and mounting asset size raises concerns on capacity and liquidity management. Portfolio managers Artur Piasecki and Eric Liu have managed this strategy together since June 2016 and have produced an impressive track record. Piasecki has 19 years of investment experience and focuses on the portfolio’s offshore investments, while Liu has 15 years under his belt and is more involved in managing the onshore sleeve.

Asset-allocation decisions are made jointly. The strategy executes a time-tested investment approach combining top-down and bottom-up analysis that has delivered excellent returns thus far. That said, strategy assets have surged to $8 billion as of March 31 2021 compared with $400 million a year ago, and the strategy’s liquidity profile has visibly deteriorated over the past year. We believe stringent capacity measures could help preserve the strategy’s nimbleness, and we would like more time to see whether the strategy can continue its success with a much larger asset base. As such, the strategy earns a People Pillar rating of Above Average and a Process Pillar rating of Average. This leads to a Morningstar Analyst Rating of Neutral across all share classes – including the D2 clean shares – except the C2 share class, which lands at Negative because of its expensive fees.

L&G ESG Emerging Markets Government Bond Local Currency Index Fund – Bronze

L&G ESG Emerging Markets Government Bond USD Index – Bronze

Jose Garcia Zarate

Low fees and broad geographical diversification are the two key advantages of passive funds for emerging market bond exposure. In this sense, these L&G funds are an interesting proposition.  A different issue is whether investors will find substantial differences relative to a non-ESG peer. What the current crop of ESG government bond indices mostly does is reweighting the components of the non-ESG parents, typically resulting in portfolios slightly tilted to issuers with higher credit ratings. The strategy is awarded a Morningstar Analyst Rating of Bronze.

Upgrades

AXA Global High Income – Silver from Bronze

Evangelia Gkeka

AXA Global High Income benefits from experienced portfolio managers that utilise a differentiated approach to high-yield investing. The strategy’s clean share class (Z Gross Acc) was upgraded to Silver from Bronze. Other share classes are rated between Silver and Neutral, depending on fees. The upgrade is driven by an upgrade of the Process Pillar rating to High from Above Average. The strategy uses a buyand-hold approach aiming to generate returns by receiving income rather than relying on a potential rise in bond prices. It follows a differentiated approach with overweightings in lower-rated and shorter dated bonds. The process has been well-executed over time, aided by the experienced portfolio managers and their dedicated high-yield analyst team. Performance is consistently ahead of peers and passive alternatives in the space, on an absolute and risk-adjusted basis, but slightly behind the category index.

AXA WF Global High Yield Bond – Silver from Bronze

Evangelia Gkeka

AXA WF Global High Yield Bond benefits from experienced portfolio managers that utilise a differentiated approach to high-yield investing. The strategy’s clean share class (F Cap USD) is upgraded to Silver from Bronze. Other share classes are rated between Silver, Bronze and Neutral, depending on fees. The upgrade is driven by an upgrade of the Process Pillar rating to High from Above Average.

The strategy uses a buy-and-hold approach aiming to generate returns by receiving income rather than relying on a potential rise in bond prices. It follows a differentiated approach with overweightings in lower-rated and shorter-dated bonds. The process has been well-executed over time, aided by the experienced portfolio managers and their dedicated high-yield analyst team. Performance is consistently ahead of peers and one of the few available passive alternatives in the space on an absolute and riskadjusted basis. Although the strategy has underperformed its category index on an absolute basis, it outperformed it on a risk-adjusted basis helped by its lower volatility profile.

Downgrades

UBS ETF MSCI EMU SRI (EMUSRI) – Silver from Gold

Kenneth Lamont

UBS MSCI EMU SRI ETF tracks the MSCI EMU SRI Low Carbon Select 5% Issuer Capped Index. The strategy provides approximate exposure to the top quartile of eurozone companies ranked on environmental, social, and governance criteria. In addition to picking the most compliant stocks by sector, it also applies additional screens based on carbon emissions, fossil fuel reserve ownership, and other carbon business involvement criteria. Sector constraints and a cap-weighted methodology mean that, despite fewer holdings (52 of the index's 237 constituents), this fund remains largely representative of the opportunity set and is a suitable ESG-flavoured substitute for other funds tracking eurozone equities. The fund has an ongoing charge of 0.22%, making it cheaper than active peers in the eurozone large-cap equity Morningstar Category, although cheaper passive options--both ESG-screened and unscreened variants – are available. While we admire the fund's strategy, its relatively high fee means we can no longer award it our highest level of conviction. For this reason, we have downgraded this fund to a Morningstar Analyst Rating of Silver from Gold.

NN (L) European High Yield – Neutral from Bronze

Samiya Jmili

NN European High Yield's seasoned leadership duo implements a high-conviction bottom-up approach which has successfully added value for patient investors over the long term. However, the continuous high-turnover within the team in recent years is a major source of concern: the high churn rate in the six people investment team (of which 50% joined less than a year ago) is worrisome in a strategy where alpha generation mostly stems from security selection. Despite the stability and the investment acumen of the duo at the helm, the lack of talent retention became problematic enough to warrant a downgrade of the People rating from Above Average to Average. Thus all share classes see their Morningstar Analyst Ratings downgraded to Neutral from Bronze, with the exception of the Z cap share class, which retains its Bronze Rating.

  • As part of Morningstar's enhanced methodology for Analyst Ratings, different share classes have different Ratings

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Patrick Ge  is an Analyst on the Morningstar Manager Research team

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