New Rating for Two Fullerton Bond Strategies

Invesco Asian UK has strong features including a talented portfolio manager within a collegiate team structure and a truly active approach. The strategy is led by William Lam, who has been the lead manager here since May 2017. Lam is supported by the Henley-based Asian & Emerging Markets team, consisting of nine portfolio managers / analysts, all of whom have research responsibilities. The approach is unconstrained and focuses on opportunities in unloved areas, where the manager believes the consensus is too pessimistic. Lam's contrarian views and willingness to deviate from the index has consistently generated alpha, with stock picking as the primary driver. Whilst the People score has been maintained at Above Average, the Process score has been upgraded to High from Above Average, reflecting the strengths around strict valuation discipline, detailed fundamental research, and skilful implementation. As a result, the Morningstar Medalist Rating for the clean Z share class has been upgraded from Bronze to Silver.

T Rowe Price Asian ex-Japan Equity Q USD – Silver from Bronze

Claire Liang, CFA

This strategy continues to benefit from a veteran manager who employs a tried-and-tested investment approach and is backed by sizable analytical resources. Lead manager Anh Lu brings 28 years of experience, 22 of those at T. Rowe Price, and she has led this strategy since June 2009. She has articulated solid investment cases during our meetings and constructed the portfolio in a thoughtful manner. She is supported by 26 analysts. After seeing an uptick in personnel turnover in the first half of 2022, the team has shown better stability over the past year, though the lack of healthcare expertise in the team remains a watchpoint. The bottom-up investment approach is quality-growth-focused, seeking companies that can deliver durable earnings and cash flow growth over a multiyear period and have reasonable valuations. It has been consistently applied and has yielded robust returns over Lu’s tenure. We reiterate the strategy’s Above Average 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 Silver from Bronze for the clean share class Q USD.

Downgrades

abrdn UK Ethical Equity P1 Acc – Neutral from Bronze

Jack Fletcher-Price

abrdn UK Ethical is run by a capable team, where stocks have to pass a negative screen to be eligible in the portfolio. While the approach has been consistently implemented, our conviction has waned in the process’ ability to overcome its restrictive mandate and beat its category index. The severe ethical criteria skew the universe significantly, especially compared with an increasing number of peers employing a more pragmatic approach to exclusionary ethical investing.

As a result, we have moved the Process Pillar to Average from Above Average. While there are no restrictions on the portfolio’s relative sector weightings, the ethical criteria guide positioning in certain areas, causing pronounced structural underweightings in the oil and gas, healthcare, mining, and tobacco sectors, for example. Owing to these sector and style biases, we have seen bouts of relative under- and outperformance manifest. A strong 2019 has been followed by a difficult three and a half years for the strategy, including underperformance versus the FTSE All-Share Index by 3.3 and 21.9 percentage points over 2021 and 2022, respectively.

While we have seen the strategy bounce back from periods like this before, we have concerns about the process’ ability to add enough value through stock selection alone to counter this bias against the index.

FSSA Indian Subcontinent I USD Inc – Silver from Gold

FSSA Regional India Fund Class A Acc – Silver from Gold

Ramanand Kothari

The strategy's best-in-class portfolio manager, a solid investment team with one of the best investment cultures in the region, and a distinct, time-tested investment approach continue to earn a High rating for the People and Process Pillars. Lead manager Vinay Agarwal is an impressive investor and has been at the helm since 2012. He brings two decades of investment experience and joined the firm in 2011, providing stability to investors. Agarwal has consistently impressed us with his exceptional knowledge of the management teams of Indian companies and a solid understanding of portfolio holdings and the investable universe.

The team employs a bottom-up, quality-oriented, conviction-driven investment approach that has been time-tested and proven effective over various market cycles with a solid performance track record. It looks for high-quality companies with long-term growth prospects that are attractively valued. The most crucial aspect is the quality of a company's management team, followed by the quality of the business franchise and balance sheet. Overall, this process is less price-sensitive than others and offers flexibility. Agarwal is ready to pay a higher premium if the company meet his strict quality criteria. While we have maintained the strategy’s People and Process Pillar ratings of High, the Morningstar Medalist Rating of pricier I share classes has been downgraded to Silver from Gold due to the changes in the competitive landscape within the offshore Indian Morningstar category. Its other share classes remain Gold.

Lupus Alpha Smaller German Champions CT – Bronze from Silver

Natalia Wolfstetter

Lupus Alpha Smaller German Champions benefits from a seasoned manager with in-depth knowledge of the German small- and mid-cap universe, who has served investors well despite somewhat limited support. We also note that Glück was made a partner in the firm in January 2022 and he is invested in the fund, which supports retention and alignment. As a result, we have moved the People rating to Above Average from Average. We value the strategy's well-tested approach and consistent execution, but concerns around capacity management lead to a downgrade of the Process rating to Above Average from High. The fund is one of the largest in its category, hence capacity requires close monitoring. In that respect, the strategy could benefit from a more-formalized firm-wide approach to capacity management.

Ninety One Global Strategic Equity I Acc – Neutral from Silver

Michael Born

Mark Breedon, the long-time manager of the Ninety One Strategic Equity strategy and co-head of the 4Factor team, will be retiring from the group at the end of 2023. Although his replacements Dan Hanbury and Rhynardt Roodt are well experienced and have been embedded in the team for some time in the case of Roodt, Hanbury’s experience has concentrated more on to the UK, and how well the new setup will work is to be determined. With our conviction in the process being somewhat anchored in the experience and long tenure with the strategy, there are uncertainties with both team and process, although there is also potential for the new setup to work well. Reflecting the uncertainties that have arisen from this change, the strategy will be downgraded from Silver to Neutral for the clean I acc share class.

Rerated from Under Review

Capital Group Global Allocation (LUX) Z  - Silver from Under Review

Thomas DeFauw

Capital Group Global Allocation impresses with its seasoned manager team, proven approach, and a parent company that serves its investors exceptionally well. Continued manager turnover has slightly limited our conviction, however, leading to the strategy’s People Pillar rating being downgraded to Above Average. This results in a lowered Morningstar Medalist Rating of Silver for the clean Z share class. The fund was previously placed Under Review following the announcement that Paul Flynn will transition out of the strategy effective 1 October 2023 and not be replaced.

Fidelity Global Financial Services I Acc – Neutral from Under Review

Harsh Jain

Incoming manager duo - Mac and Lee - are yet to prove themselves. The retirement of the current Manager, Sotiris Boutsis whom we regarded well, is a loss to the strategy. Limited track record and unproven execution skills of the new manager result in our reduced conviction in People as well as Process scores to Average versus Above Average earlier. Sotiris, beginning August 1st 2023, is replaced by Muhammad Elatab (Mac) as the lead manager and Lee Sotos as Assistant Portfolio Manager. Mac and Lee are long-standing members of Fidelity's financials-sector team and by virtue of their combined research and co-portfolio management experience, bring a complementary skillset with a continued support of 28 financial and real estate analysts at Fidelity.

However, the incoming manager duo do not have any lead portfolio management track record to begin with and are yet to prove their portfolio management skills. the strategy looks for improving fundamentals where the market is not pricing improvement, with an emphasis on quality in terms of management teams, assets, and/or returns. New managers intend to follow a similar process, but execution is untested. In absence of a portfolio management track-record in a category that sees more experienced teams, we need to observe the execution of the strategy over a period to gain a strong conviction as before. This fund was previously placed Under Review.

Moved to Under Review

GAM Star Credit Opportunities (USD) Instl I Inc – Under Review from Neutral

Mara Dobrescu, CFA

In August 2023, the proposed sale of this strategy's parent company, GAM, to U.K.-based asset manager Liontrust was stymied in a high-profile boardroom fight, leading to the ouster of the board of directors and planned leadership changes. A concurrent plan emerged, championed by a group of activist investors, to restore GAM's profitability by enacting significant cost-cutting measures, a rationalization of the fund range, and reduced staff-compensation targets in an attempt to restore profitability. While the situation is still in flux, these events increase uncertainty about the firm's strategic direction, and we believe there are critical challenges ahead in GAM's path to recovery.

These events have prompted us to lower GAM's Parent rating to Low from Below Average. This strategy, subadvised by third-party manager Atlanti and distributed by GAM, is to some extent insulated from the turmoil for now. Its portfolio managers have extensive autonomy to carry out the investment process, and their compensation is not dependent on GAM's financial situation. On the other hand, if the financial pressure and outflows incurred by GAM extended to the subadvisor level, there could be cause for concern. We are thus placing the strategy's rating Under Review for now and will revise our take as we gain more clarity on the situation. Previously, the Morningstar Medalist Rating for the clean share class was Neutral, with the most expensive share class rated Negative.

Janus Henderson Continental European I2 EUR – Under Review from Bronze

Janus Henderson European Selected Opportunities I Acc – Under Review from Bronze

Michael Born

On August 31, 2023, Janus Henderson announced that John Bennett, lead manager on the Continental European, European Focus, and European Select strategies, would be retiring at the end of August 2024. Bennett has been with Janus Henderson for 12 years of his 43-year-long career, being named portfolio manager in 2010, and will continue to work with the team over the next 12 months to ensure a smooth transition. His replacements will be Tom O'Hara and Tom Lemaigre, who have worked closely with Bennett for five years now, being named as co-portfolio managers in 2020 (O'Hara) and 2022 (Lemaigre). As a result of this announcement, we have placed these strategies under review while we evaluate the change to the investment team. Previously the ratings for Janus Henderson Continental European ranged from Silver to Neutral, depending on fees, with the clean I2 EUR share class rated Bronze. While the ratings for Janus Henderson European Selected Opportunities ranged from Silver to Bronze, depending on fees, with the clean I Acc share class rated Silver.

TCW Core Plus Bond RU – Under Review from Silver

Brian Moriarty

TCW has announced big changes to its fixed income management ranks, the most significant of which are that generalist portfolio managers Laird Landmann and Stephen Kane will retire at the end of 2023 and 2024, respectively. As Landmann and Kane help oversee the majority of TCW's $210 billion in assets under management, Morningstar has placed their strategies Under Review. This dual retirement announcement is not the firm's only recent brush with major leadership changes. Former CIO Tad Rivelle retired at the end of 2021, while former CEO David Lippman followed him one year later. Stephen Kane and Bryan Whalen inherited Rivelle's mantle as co-CIOs, while Katie Koch joined in February 2023 to replace David Lippman as CEO. As part of the most recent announcement, Kane will give up his co-CIO title at the end of 2023 but remain as a generalist portfolio manager through 2024. Those earlier departures, particularly Rivelle's, were unexpected and set off a domino effect that can be seen today.

It's clear that the firm is making room for the next generation of fixed-income leaders. In addition to Landmann and Kane's future retirements, TCW also announced a slew of promotions that take effect immediately. Ruben Hovhannisyan and Jerry Cudzil are now generalist portfolio managers. Hovhannisyan has worked closely with Landmann, Kane, and Whalen, while Jerry Cudzil has served as co-head of global credit and head of credit trading. Meanwhile, Steve Purdy, co-head of global credit and head of credit research, has joined the management team of Metropolitan West Unconstrained Bond. Four other senior research professionals have been promoted to senior portfolio manager (a newly created role) and will form a U.S. fixed-income investment committee. It's not yet clear how this new committee will work with or supplement the generalists, as they have historically set risk budgets and outlooks, work that is often done by committees at competing firms. Previously, the Morningstar Medalist Rating ranged from Gold to Neutral, with the clean RU share class rated Silver.

UBS Factor MSCI USA Quality ESG ECITS ETF (USD) A DIS – Under Review from Silver

Monica Calay

We are initiating a review of the UBS Factor MSCI USA Quality ESG UCITS ETF owing to recent changes in its benchmark index. The fund has transitioned from tracking the MSCI USA Quality Total Return (Net) Index to the MSCI USA Quality ESG Low Carbon Select Index. As a result, we have not previously rated any funds that follow this new index, prompting the need for a comprehensive assessment. The decision to shift to the MSCI USA Quality ESG Low Carbon Select Index introduces a material change in the fund's investment strategy. The new index's tracking error, relative to the parent universe - the MSCI USA - has shown to be significantly higher than that of the old index.

Given the deviation in tracking error, we aim to conduct an in-depth analysis to understand the implications of this transition. Our review will encompass evaluating the fund's Process and People Pillars. During this period of review, we recommend investors exercise caution and more closely monitor the fund's performance. We will shortly provide further updates and recommendations based on our findings. Previously the fund was rated Silver.