The combination of a middling Process Pillar rating and a Low People Pillar rating limit  KraneShares Hang Seng TECH ETF to a Morningstar Medalist Rating of Neutral.  The portfolio maintains a sizable cost advantage over competitors, priced within the second-cheapest fee quintile among peers.  

 The team managing the passive strategy earns a Low People Pillar. The strategy gets an Average Process Pillar rating.  High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And a low quality exposure is rooted in stocks with higher financial leverage and lower profitability. Even though the strategy's parent organization has some investor-friendly attributes like significant personal investments from managers, a bench of limited-tenure portfolio managers holds it back. As a result, the firm obtains a Low Parent Pillar.

Analyst Rating

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. KraneShares Hang Seng TECH ETF earns an Average Process Pillar rating. The most important driver of the rating is that this fund tracks an index. Historical data, such as Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Low expenses across its parent firm's funds, whose fees, on average, rank in the second-cheapest quintile of their respective category, also contribute to the process. The pattern of low expenses at the firm indicates that it is focused on delivering strong results for investors. Lastly, the process is limited by the parent firm's five-year retention rate of 54%, which suggests it could do more to retain its portfolio managers.

The investment strategy as stated in the fund's prospectus is:  The investment seeks to provide investment results that, track the price and yield performance of the Hang Seng TECH Index.  Under normal circumstances, the fund will invest at least 80% of its net assets in instruments in its underlying index or in instruments that have economic characteristics similar to those in the underlying index. The index is composed of the equity securities of the 30 technology companies with the largest free float market capitalization that are listed on the Hong Kong Stock Exchange with significant exposure to internet, fintech, cloud computing, and e-commerce and digital technology. The fund is non-diversified. 

 The portfolio is overweight in consumer cyclical and communication services relative to the category average by 21.8 and 13.8 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and consumer defensive, underweight the average by 16.4 and 7.4 percentage points of assets, respectively. The portfolio is positioned across 31 holdings and is quite concentrated. In particular, 75.4% of the portfolio's assets are housed within the top 10 holdings, compared to the category’s 36.9% average. And in closing, in terms of portfolio turnover, on a year-over-year basis, 126% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

Average

Process

Kraneshares’s team earns a Low People Pillar rating. The most important driver of the rating is the instability of management across its parent firm. The firm's asset-weighted manager tenure of five years suggests it could do more to retain portfolio managers. The managers' failure to consistently outperform peers at the funds they run, as measured by their combined three-year manager excess returns, also detracts from the team. The parent firm's five-year success ratio of 50% further hinders the team. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median return for the period. The parent's modest success ratio suggests that the firm could do better across its fund lineup.

People

Kraneshares has a ways to go to become an industry-standard steward, resulting in a Low Parent Pillar rating. Despite the negative rating, an area of strength of the firm is manager investment.  Over 29% of the firm's assets are covered by invested managers, in an effort to align portfolio manager and shareholder interests. Kraneshares's longest-tenured managers do not possess the same experience as management teams at other firms, a detractor from its rating. Specifically, average asset-weighted tenure within the firm is only five years.

Parent

KraneShares Hang Seng Tech Index ETF

The KTEC ETF provides exposure to the 30 largest Chinese technology companies listed in Hong Kong. The passively managed fund selects companies headquartered and operating primarily in Greater China (Hong Kong, Macau, and Mainland China). Companies should be in the industrials, consumer discretionary, health care, financials, or information technology sectors. These companies should also display strong research and development investment and high revenue growth under the following themes: internet, fintech, cloud computing, e-commerce, and digital technology. 

KTEC tracks a market-cap-weighted index of the 30 largest Chinese technology companies.

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