A sound investment process and strong management team underpin Brandes U.S. Small-Mid Cap Value ETF's Morningstar Medalist Rating of Silver. The portfolio maintains a sizable cost advantage over competitors, priced within the least expensive fee quintile among peers.  

 The strategy's sensible investment philosophy merits an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an underweight position in liquidity exposure and momentum exposure compared with category peers. Low liquidity risk exposure is attributed to stocks with a low trading volume, limiting managers' flexibility. And low momentum exposure is rooted in holding stocks that are not currently on a winning streak and instead holding those that managers believe are undervalued. The management team's considerable industry experience earns it an Above Average People Pillar rating. The strategy's parent organization earns the firm an Above Average Parent Pillar rating, and this rating is inherited from vehicles belonging to the same branding entity and is indirectly assigned by an analyst.

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Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category index on a risk-adjusted basis over the long term. Brandes U.S. Small-Mid Cap Value ETF earns an Above Average Process Pillar rating. 

The most meaningful contributor to the rating is the parent firm's five-year risk-adjusted success ratio of 76%. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median Morningstar Risk-Adjusted Return for the period. The firm's five-year retention rate of 88% also strengthens the process. Lastly, the process is limited by being an actively managed strategy. Historical data, like Morningstar's Active/Passive Barometer, finds that actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons.

 This strategy does not differentiate itself from its Small Value category peers in terms of size and style exposure. Analyzing additional factors, this strategy continually held some stocks with low trading volume over the last few years. Less-liquid stocks might offer strong returns to compensate for their risks, but they can be harder and more expensive to trade in bear markets. In the latest month, the strategy was also less exposed to the Liquidity factor compared with Morningstar Category peers. This strategy has also demonstrated a bias towards lower-momentum stocks over its peers over the past years. Momentum strategies typically bet that stocks that have recently outperformed will continue to do so, and those that have recently underperformed will keep lagging. Avoiding the former and buying the latter could indicate that managers are averse to chasing momentum. Similarly, in recent months, the strategy also had less exposure to the Momentum factor than peers. In addition, this strategy has favored high-quality stocks compared to peers over the years, which could be a good option for downside risk protection. High exposure to the quality factor means holding companies that are consistently profitable, growing, and have solid balance sheets. In this month, the strategy also had more exposure to the Quality factor over its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section. 

 The portfolio is overweight in healthcare and consumer defensive relative to the category average by 14.9 and 6.4 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and consumer cyclical, underweight the average by 7.5 and 5.8 percentage points of assets, respectively. The portfolio is positioned across 81 holdings and is less top-heavy than peers. Specifically, 21.2% of the fund’s assets are concentrated within the top 10 fund holdings, as opposed to the category’s 28.9% average.

Above Average

Process

Brandes U.S. Small-Mid Cap Value ETF earns an Above Average People Pillar rating. The most meaningful contributor to the rating is its parent firm's five-year success ratio of 77%. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median return for the period. The firm's five-year retention rate of 88% also influences the rating. Lastly, the rating is limited by the number of months that the management team has been running this vehicle together. Since this is a newly incepted product, more time is needed to monitor the team's capability at executing the strategy.


Gregory Rippel, the longest-tenured manager on the strategy, boasts 20 years of listed portfolio management experience. They are currently not a named manager on any additional investment vehicles, narrowing their focus to one strategy. Gregory Rippel has an experienced backdrop of support. The three listed managers boast 11 years of average listed portfolio management experience. None of the portfolio managers here invest in this fund. This hurts the rating because manager investment would align their interests with the strategy's investors.

People

Brandes is a stable asset management firm centered around a single investment philosophy applied with discipline and patience. The firm earns an Above Average Parent rating.
Brandes is a small independent asset manager based in San Diego, founded by Charles Brandes in 1974. He retired in 2018 and no longer has any role at the firm. He also exited the partnership, but he is still due payments for his interests in the firm until 2029. The ownership transfer is self-funded by the firm and its existing partners, preserving the firm's independence and its sound investment culture. The planned transition to a new CEO slated for May 2024 is unlikely to shake things up. Firm veteran Oliver Murray—currently global head of client services—will replace Brent Woods, who has led the firm for the past 10 years. Woods will remain at Brandes, becoming president of the firm’s general partner with Murray reporting to him. Woods will also remain a fund manager at the firm. A series of promotions were made in conjunction, including a newly created role of director of research and the addition of three limited partners. 
We have no reason to believe the firm’s good culture will be challenged through the CEO transition. Brandes has stuck to its deep-value style over time even as assets under management have declined sharply since 2008 because of subdued performance and hefty outflows. According to senior management, the firm remains profitable, and its investment capabilities have been safeguarded. Brandes benefits from a pool of seasoned fund managers and analysts with very long tenures. It’s not rare that investment personnel spend the bulk of their careers at the firm. Teamwork is clearly emphasized with several investment committees running the strategies, which reduces key-person risk. 
Compared with appropriate value indexes, the firm’s fund range has performed well on average in the long run, though the emerging-markets equity strategy and the small fixed-income products have delivered mixed results. Another area of improvement would be to formally link the managers' variable compensation to the funds' performance. Our concerns are alleviated by the firm's co-investment policy, whereby fund managers must invest in the funds alongside investors.

Parent

Brandes US Small-Mid Cap Value ETF

BSMC is actively managed, investing in equity securities of small- and mid-cap companies in the US. The fund seeks securities that are perceived to be undervalued.

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News for Brandes US Small-Mid Cap Value ETF ETF (BSMC)