Xtrackers Harvest CSI 300 China A ETF earns a Morningstar Medalist Rating of Neutral with strength in areas such as People offset by weaker spots such as Process. The portfolio maintains a cost advantage over competitors, priced within the cheapest fee quintile among peers.  

 The strategy merits a Below Average Process Pillar rating. The strategy’s management team earns an Above Average People Pillar rating. The strategy's parent organization earns the firm an Average Parent Pillar rating. People, Process and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

The CSI 300 Index is provided by the China Securities Index Company Limited, a joint venture between the Shanghai Stock Exchange and the Shenzhen Stock Exchange. It is one of the most widely quoted indexes inside and outside mainland China. The CSI 300 Index is a free-float-adjusted market-capitalization-weighted portfolio composed of the A-shares of the 300 largest Chinese companies trading on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The index’s advisory committee has certain subjective leeway in selecting the constituents. To be included in the index, stocks must be listed for more than three months, must be in the most liquid 50% of all China A-shares (60% for existing constituents), must not have had financial problems or legal/regulatory infractions, must not have exhibited large price volatility that shows evidence of manipulation, and must be considered appropriate by the committee. The underlying stocks are reviewed semiannually. 

With this selection criteria, the index covers more than 50% of the eligible universe (proxied by the MSCI China A Onshore IMI Index), or just under 70% of the MSCI China A Index, which only includes the A-shares available through the Stock Connect scheme. Sector exposure is now fairly diversified with the three largest sectors (as defined by GICS)--financials, industrials, and information technology--at 14% to 20% each as of November 2023. Single-stock concentration is minimal as no stock accounts for more than 6% of the portfolio and the top 10 constituents combined accounted for just over 20% of the index’s market capitalization as of November 2023. However, by limiting itself to the 300 largest stocks in the market, the portfolio is skewed toward giant and large caps.

Note: The Process Pillar rating and analysis are indirectly assigned by an analyst. When an analyst covers a passively managed vehicle that tracks a particular index, Morningstar associates the Process Pillar rating assigned to that vehicle with the index concerned. Morningstar then maps the Process Pillar associated with a given index to any other uncovered passive strategies that track the same index. This ensures that the analyst’s view is leveraged whenever available and promotes consistency when analyzing passive vehicles associated with a given index.

Below Average

Process

Xtrackers’s team is strong compared with others in the industry, resulting in an Above Average People Pillar rating. There are two managers listed on the fund: Feng Gao, West Wang. Experience on the team is abundant, with 10 years of average portfolio management experience. Together, they manage a total of two strategies, with an asset-weighted average Morningstar Medalist Rating of Neutral. This means, in aggregate, the team falls short and will struggle to produce positive alpha relative to the category median. The team has faced turnover as of late, with Kevin, Siu Chung Sung leaving within the last about a month ago. Even though it is a passive fund, high turnover can still hinder the effectiveness of the investment process. 

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

Above Average

People

In the past two years, DWS has been under heavy scrutiny from the SEC and German authorities owing to greenwashing allegations that were initially raised in August 2021 by the firm’s former chief sustainability officer Desiree Fixler. The SEC announced on Sept. 25, 2023, that it has fined DWS USD 19 million for failing to implement procedures to ensure that all investment staff members were following its environmental, social, and governance policies. This relates to funds where ESG factors were analyzed alongside other financially material factors, but where managers retained discretion over ESG outcomes. In addition, the firm was ordered to pay USD 6 million for deficiencies in its anti-money-laundering processes that were uncovered in a separate investigation. The investigation by the German authorities into the firm's ESG disclosures is still ongoing.  
The SEC findings underline that despite strong senior management commitment, it takes a considerable amount of time and resources to embed sustainability across all levels of an organization for firms without a long-standing sustainability heritage. Overconfidence and failure to deal with internal criticism adequately appear to have contributed to DWS' misleading statements on ESG matters. While it's difficult to quantify the financial damage to clients and no misstatements were detected in financial disclosures or prospectuses, we believe the firm’s shortcomings have the potential to adversely affect investor outcomes. Hence, we welcome DWS' efforts to strengthen governance around ESG integration and communicate more conservatively about its ESG capabilities.
Questionable and unsteady leadership has contributed to the DWS' woes. Previous CEO Asoka Woehrmann, who had spearheaded the firm's ESG push, stepped down in June 2022 as a result of the ESG investigations. His credibility had already been harmed following his use of personal email for business purposes and a large payment made to him by a client when he was head of Deutsche Bank's private-client business before being appointed as DWS' CEO in 2018. His successor Stefan Hoops is the firm's sixth CEO in the past 10 years, highlighting the instability in the firm's top leadership. This appointment also shows the continued influence of its parent company, even after the partial IPO in 2018. Hoops has spent most of his career at Deutsche Bank but has no asset-management background.
Despite all these negative headlines and shaky leadership, DWS has managed to remain quite stable in its investment ranks. The firm has also made strides to gain greater independence. For example, since 2020, bonuses have been linked to the firm's own performance rather than to that of the bank as a whole, which supports alignment and talent retention. Variable remuneration takes into account performance of up to five years.
DWS' vast fund lineup covers all asset classes, including passive strategies, which are offered under the Xtrackers brand. Many offerings don't distinguish themselves, but there are genuine areas of strength among active strategies, and fees are competitive across many funds. While the product development process has been streamlined, and although the firm has launched new strategies at a slower pace, lineup turnover remains a concern as a culture of asset-gathering prevails. New offerings are partly related to an expansion of ESG capabilities, but the firm is also building out its thematic equity, multi-asset, alternatives, and exchange-traded fund range. 
At this stage, we continue to believe that DWS' strengths justify a Parent Pillar rating of Average despite several weaknesses in its stewardship practices, but we will closely monitor the company for further disruption.

Average

Parent

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