A strong management team and sound investment process underpin First Trust TCWOpportunistic Fxd Inc ETF's Morningstar Medalist Rating of Gold. The strategy charges fees in line with its similarly distributed peers, priced within the middle quintile.  

 The management team's considerable industry experience drives a High People Pillar rating for the strategy. The strategy's investment approach stands out and earns a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a significant underweight position in corporate bonds and A rated bonds compared with category peers. The strategy's parent organization is industry standard, albeit with some strong attributes like overall attractive fees, but is held back by an unstable portfolio manager lineup. This earns the firm an Average Parent Pillar rating.

Analyst Rating

The strategy exhibits a strong balance between flexibility and discipline, and the managers have been able to execute throughout a variety of market environments, supporting a High Process rating.

This strategy is run by value investors looking to buy bonds when they're cheap and sell them when they get expensive. It's benchmarked against the Bloomberg US Aggregate Bond Index, but the managers actively adjust duration relative to the index and have the flexibility to invest outside it. The managers dial risk up and down in predictable fashion. When yields offered by corporate bonds over US Treasuries reached historic lows in 2007, for example, they reduced the portfolio's corporate stake to 7% by early 2008, then reversed course as spreads widened later that year. More recently, they entered 2020 defensively positioned with ample US Treasuries and agency mortgage exposure, then quickly took advantage of opportunities offered in March 2020.

Assets in the US fund grew from $30 billion in 2014 to a peak of $85 billion entering March 2020. But during that market crisis, the team showed that it was able to reposition the mostly cash-bond portfolio with speed and precision despite its bulk; that’s especially impressive considering the difficult liquidity conditions during that period, and it’s a testament to operations and execution as much as philosophy. This UCITS product is only EUR 179 million, tiny compared with the US fund and overall strategy assets.

Note: The Process Pillar rating and analysis are indirectly assigned by an analyst. When an analyst covers a vehicle that follows a given strategy (as codified by Morningstar’s StrategyID data point) Morningstar maps the covered vehicle’s Process Pillar to any other uncovered vehicles that follow the same strategy (that is, share the same StrategyID). This ensures that the analyst’s view is leveraged whenever available and promotes consistency when assigning Process Pillar ratings to vehicles that follow the same strategy.

High

Process

With incoming CEO Katie Koch set to take over in early 2023, there is better clarity around the management of this strategy. As a result, its People rating has been upgraded to High from Above Average. 

The strategy is managed by Laird Landmann, Steve Kane, and Bryan Whalen. Landmann and Kane have worked together since the early 1990s, with stints at Hotchkis & Wiley and Pimco before founding MetWest, alongside former CIO Tad Rivelle, in 1996. Whalen joined the firm in 2004 and became a generalist in 2013; he was named co-CIO alongside Steve Kane when Rivelle’s retirement was announced in late 2021. 

Following the 2021 retirement of Rivelle and the expected 2022 retirement of CEO David Lippman, there was a material risk that one of the remaining trio of generalist portfolio managers would step into the CEO spot in 2023. With the announcement that Koch would instead take that role, that risk is reduced. There is still key-person risk around Landmann, Whalen, and Kane, but the skill of that trio, demonstrated over decades, means this strategy remains in good hands. 

The firm’s supporting teams are experienced and impressive; that includes 19 securitized specialists, 20 corporate credit analysts, and nine corporate credit traders, in addition to a smaller but very seasoned rates group. The firm’s emerging-markets team has long been an industry standout but plays a very limited role on this strategy.

Note: The People Pillar rating and analysis are indirectly assigned by an analyst. When an analyst covers a vehicle that follows a given strategy (as codified by Morningstar’s StrategyID data point), Morningstar maps the covered vehicle’s People Pillar ratings to any other uncovered vehicles that follow the same strategy (that is, share the same StrategyID). This ensures that the analyst’s view is leveraged whenever available and promotes consistency when assigning People Pillar ratings to vehicles that follow the same strategy.

People

First Trust meets the industry standard for stewardship, but it could do more to align itself with investors. It earns an Average Parent rating.

This is a team-oriented organization that eschews star managers. While exchange-traded funds represent the bulk of the firm's assets, First Trust bypasses the competitive market for low-cost beta funds, instead opting for complex strategies with higher management fees. However, the firm's focus on ETFs for future product development underpins its commitment to tax efficiency and transparency. Some of its thematic strategies appear trendy, but it stands behind them and rarely liquidates funds. 

The firm is a private partnership, controlled by Jim Bowen, the CEO. Many senior managers are limited partners. This ownership structure helps the firm stay focused on the long term and promotes retention, which has been strong for the investment team. The firm has grown considerably over the past decade and is among the largest providers of actively managed ETFs, as well as unit investment trusts. As it has grown, the firm has expanded its investment team and beefed up its technology infrastructure.

First Trust's focus is on educating advisors and providing them solutions. This may benefit investors indirectly, but First Trust could do more to directly align with investors by cutting fees and limiting trendy strategies.

Average

Parent

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