U.S. markets closed

UBS UK MSCI

Dimitar Boyadzhiev (dimitar.boyadzhiev@morningstar.com)

en-GB UBS boasts a solid portfolio management team with well-established leadership. The stability of the team is a key strength, and we believe UBS' ETFs benefit from the expertise of UBS Asset Management, where passive investment and indexing are a core offering.

The index equity and alternatives team is headed by Ian Ashment, who took over in 2006. It comprises 21 portfolio managers and six research analysts, based in London, Zurich, and Sydney.

UBS offers both physical and synthetically replicated ETFs. The choice of replication method depends on several factors, including the size of the portfolio, liquidity of the benchmark constituents, custody costs, tracking-error tolerance and general availability of data. Day-to-day fund management is carried out as a team effort, along with globally consistent processes and practices. For the physical range, UBS ETFs employ full, sampled, or optimized physical replication.

The portfolio managers have leeway to trade before and after rebalancing to minimise market impact. The portfolio managers conduct extensive research on performance patterns of stocks added to and deleted from indexes, and such analysis supports effective trading strategy for index rebalancing. Part of this research includes predicting potential additions and deletions. However, preannouncement trading is not used for ETFs.

This fund uses full replication to track the performance of the MSCI MSCI United Kingdom Index Net Return index. The fund invests in all the constituents of the index with the same weightings stipulated by the index. Routine cash stock dividends are reinvested according to index rules using an overdraft facility available from the custodian, State Street Bank. This practice helps reduce tracking error.

The fund engages in securities lending to help improve tracking performance. Gross lending revenues are split 60/40 between the fund and lending agent State Street Bank, respectively, while the latter covers all the operational costs. In the 12 months to this writing, the fund lent out 2.9% of its assets on average and a maximum of 9.9% at any point in time. The activity generated 0.0049% of net revenue for the fund. Although this activity serves to enhance returns, it also introduces counterparty risk. To protect the fund, borrowers are requested to post collateral equivalent to 105% of the loan value. Counterparty risk is monitored on a daily basis by the lending agent. As a general rule, the amount of securities that can be lent by the ETF at any point in time is capped at 50% of its net asset value. To further mitigate counterparty risk, State Street also provides borrower default indemnification in the event a borrower is unable to return the securities.

The MSCI United Kingdom Index is designed to measure the performance of the large- and mid-cap segments of the UK market. With 96 constituents as of this writing, the index aims to cover approximately 85% of the free-float-adjusted market cap in the UK. The index is reviewed quarterly and rebalanced semiannually, in May and November. As of this writing, the makeup of the MSCI United Kingdom Index is very similar to that of the FTSE 100 Index.

The constituents of the index are determined quarterly.

The index's top sector exposures include financial services and consumer defensive (both 18%-23%), energy (15%-20%), and healthcare (10%-15%). AstraZeneca, HSBC, and BP are the three largest components of the MSCI United Kingdom Index, with a 5%-10% weighting each. The next largest stocks represented are Royal Dutch Shell and AstraZeneca, with a 4%-6% weighting each. Core UBS MSCI United Kingdom ETF We acknowledge the advantages of a passive approach to the UK equity market. Given its meaningful cost advantage, we believe UBS MSCI United Kingdom ETF can deliver above-average return over the long term. We upgraded its Morningstar Analyst Rating to Bronze from Neutral.

The MSCI United Kingdom Index is oriented toward giant caps and leaves investors underexposed to the other size segments of the UK market. This reduces the odds to consistently outperform better-diversified UK large-cap equity Morningstar Category peers.

Active managers have demonstrated they can add value over long stretches of time by overweighting mid- and small caps when the market environment is favourable to the latter. On the passive side, we have a more favourable view of funds that track the broader FTSE All-Share Index.

This exchange-traded fund has lagged the average peer in its category by around 0.7 percentage points since its 2012 inception. Other funds that track the FTSE 100 Index, another UK large cap index that is very similar to the MSCI United Kingdom, with longer records have underperformed around three fourths of the UK large-cap fund universe in the past 10 years on a risk-adjusted basis. Over this period, the MSCI United Kingdom Index has suffered from unfavorable stock exposure to the financial-services, consumer defensive, and consumer cyclical sectors.

Overall, the MSCI United Kingdom Index might not the best choice to benefit from the full potential of the UK equity market. But if one is looking simply for exposure to the largest-cap segment, this ETF is hard to fault. It charges a competitive fee of 0.20% and boasts a minimal level of tracking error, and we have a positive view of UBS and its portfolio management team. 1704 1704 Barbara Claus Barbara Claus UBS Asset Management is one of three divisions of Swiss bank UBS, which has been refocusing its business away from investment banking and towards asset and wealth management. The firm was hit hard by the financial crisis in 2008, which led to massive fund outflows and staff cuts. Consequently, UBS AM has made significant strategic and personnel changes. As part of the restructuring process started in 2014, the firm has transformed its former multiboutique structure into a more integrated platform. The product offering and investment processes were overhauled to focus on client needs and ensure repeatability. We welcome these changes and note other improvements in the past five years, mainly in relation to fee structures, performance, and manager tenure. Still, we note that the number of fund launches and closures remains high, including funds that appear to cater to short-term market trends, which is a concern and bears monitoring.

Since mid-2015, the firm has experienced some leadership turnover. In 2016, the firm's head of fixed income left. In 2017, former head of investments, Dawn Fitzpatrick, resigned as well; she has been replaced by Suni Harford. The firm's Parent Pillar rating remains Neutral, but we have a close eye on how top-level personnel turnover and product-development practices affect the firm's investment capabilities.

UBS AM has improved its structure, but high turnover on the leadership level is concerning. 2019-03-19T10:41:00 2019-03-19T15:41:00Z The fund's risk-adjusted returns over the trailing three and five years have been like the average peer in the UK large-cap equity category.

When looking at absolute returns only, during the trailing five years through November 2019, the fund's total return almost matched that of the category average. This can be largely attributed to the fund's cost advantage as the fund is underexposed to smaller companies.

Despite its bias to larger stocks, the fund's three- and five-year standard deviations are slightly higher than the category average.

F00000Y74K UBS MSCI United Kingdom ETF We acknowledge the advantages of a passive approach to the UK equity market. Given its meaningful cost advantage, we believe UBS MSCI United Kingdom ETF can deliver above-average return over the long term. We upgraded its Morningstar Analyst Rating to Bronze from Neutral.

The MSCI United Kingdom Index is oriented toward giant caps and leaves investors underexposed to the other size segments of the UK market. This reduces the odds to consistently outperform better-diversified UK large-cap equity Morningstar Category peers.

Active managers have demonstrated they can add value over long stretches of time by overweighting mid- and small caps when the market environment is favourable to the latter. On the passive side, we have a more favourable view of funds that track the broader FTSE All-Share Index.

This exchange-traded fund has lagged the average peer in its category by around 0.7 percentage points since its 2012 inception. Other funds that track the FTSE 100 Index, another UK large cap index that is very similar to the MSCI United Kingdom, with longer records have underperformed around three fourths of the UK large-cap fund universe in the past 10 years on a risk-adjusted basis. Over this period, the MSCI United Kingdom Index has suffered from unfavorable stock exposure to the financial-services, consumer defensive, and consumer cyclical sectors.

Overall, the MSCI United Kingdom Index might not the best choice to benefit from the full potential of the UK equity market. But if one is looking simply for exposure to the largest-cap segment, this ETF is hard to fault. It charges a competitive fee of 0.20% and boasts a minimal level of tracking error, and we have a positive view of UBS and its portfolio management team. 1704 1704 Barbara Claus Barbara Claus UBS Asset Management is one of three divisions of Swiss bank UBS, which has been refocusing its business away from investment banking and towards asset and wealth management. The firm was hit hard by the financial crisis in 2008, which led to massive fund outflows and staff cuts. Consequently, UBS AM has made significant strategic and personnel changes. As part of the restructuring process started in 2014, the firm has transformed its former multiboutique structure into a more integrated platform. The product offering and investment processes were overhauled to focus on client needs and ensure repeatability. We welcome these changes and note other improvements in the past five years, mainly in relation to fee structures, performance, and manager tenure. Still, we note that the number of fund launches and closures remains high, including funds that appear to cater to short-term market trends, which is a concern and bears monitoring.

Since mid-2015, the firm has experienced some leadership turnover. In 2016, the firm's head of fixed income left. In 2017, former head of investments, Dawn Fitzpatrick, resigned as well; she has been replaced by Suni Harford. The firm's Parent Pillar rating remains Neutral, but we have a close eye on how top-level personnel turnover and product-development practices affect the firm's investment capabilities.

UBS AM has improved its structure, but high turnover on the leadership level is concerning. 2019-03-19T10:41:00 2019-03-19T15:41:00Z The fund's risk-adjusted returns over the trailing three and five years have been like the average peer in the UK large-cap equity category.

When looking at absolute returns only, during the trailing five years through November 2019, the fund's total return almost matched that of the category average. This can be largely attributed to the fund's cost advantage as the fund is underexposed to smaller companies.

Despite its bias to larger stocks, the fund's three- and five-year standard deviations are slightly higher than the category average.

It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category's cheapest quintile. Based on our assessment of the fund's People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze. F00000QK1B UBS MSCI United Kingdom ETF We acknowledge the advantages of a passive approach to the UK equity market. Given its meaningful cost advantage, we believe UBS MSCI United Kingdom ETF can deliver above-average return over the long term. We upgraded its Morningstar Analyst Rating to Bronze from Neutral.

The MSCI United Kingdom Index is oriented toward giant caps and leaves investors underexposed to the other size segments of the UK market. This reduces the odds to consistently outperform better-diversified UK large-cap equity Morningstar Category peers.

Active managers have demonstrated they can add value over long stretches of time by overweighting mid- and small caps when the market environment is favourable to the latter. On the passive side, we have a more favourable view of funds that track the broader FTSE All-Share Index.

This exchange-traded fund has lagged the average peer in its category by around 0.7 percentage points since its 2012 inception. Other funds that track the FTSE 100 Index, another UK large cap index that is very similar to the MSCI United Kingdom, with longer records have underperformed around three fourths of the UK large-cap fund universe in the past 10 years on a risk-adjusted basis. Over this period, the MSCI United Kingdom Index has suffered from unfavorable stock exposure to the financial-services, consumer defensive, and consumer cyclical sectors.

Overall, the MSCI United Kingdom Index might not the best choice to benefit from the full potential of the UK equity market. But if one is looking simply for exposure to the largest-cap segment, this ETF is hard to fault. It charges a competitive fee of 0.20% and boasts a minimal level of tracking error, and we have a positive view of UBS and its portfolio management team. 1704 1704 Barbara Claus Barbara Claus UBS Asset Management is one of three divisions of Swiss bank UBS, which has been refocusing its business away from investment banking and towards asset and wealth management. The firm was hit hard by the financial crisis in 2008, which led to massive fund outflows and staff cuts. Consequently, UBS AM has made significant strategic and personnel changes. As part of the restructuring process started in 2014, the firm has transformed its former multiboutique structure into a more integrated platform. The product offering and investment processes were overhauled to focus on client needs and ensure repeatability. We welcome these changes and note other improvements in the past five years, mainly in relation to fee structures, performance, and manager tenure. Still, we note that the number of fund launches and closures remains high, including funds that appear to cater to short-term market trends, which is a concern and bears monitoring.

Since mid-2015, the firm has experienced some leadership turnover. In 2016, the firm's head of fixed income left. In 2017, former head of investments, Dawn Fitzpatrick, resigned as well; she has been replaced by Suni Harford. The firm's Parent Pillar rating remains Neutral, but we have a close eye on how top-level personnel turnover and product-development practices affect the firm's investment capabilities.

UBS AM has improved its structure, but high turnover on the leadership level is concerning. 2019-03-19T10:41:00 2019-03-19T15:41:00Z The fund's risk-adjusted returns over the trailing three and five years have been like the average peer in the UK large-cap equity category.

When looking at absolute returns only, during the trailing five years through November 2019, the fund's total return almost matched that of the category average. This can be largely attributed to the fund's cost advantage as the fund is underexposed to smaller companies.

Despite its bias to larger stocks, the fund's three- and five-year standard deviations are slightly higher than the category average.

It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category's cheapest quintile. Based on our assessment of the fund's People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze. F00000QDFX UBS MSCI United Kingdom ETF We acknowledge the advantages of a passive approach to the UK equity market. Given its meaningful cost advantage, we believe UBS MSCI United Kingdom ETF can deliver above-average return over the long term. We upgraded its Morningstar Analyst Rating to Bronze from Neutral.

The MSCI United Kingdom Index is oriented toward giant caps and leaves investors underexposed to the other size segments of the UK market. This reduces the odds to consistently outperform better-diversified UK large-cap equity Morningstar Category peers.

Active managers have demonstrated they can add value over long stretches of time by overweighting mid- and small caps when the market environment is favourable to the latter. On the passive side, we have a more favourable view of funds that track the broader FTSE All-Share Index.

This exchange-traded fund has lagged the average peer in its category by around 0.7 percentage points since its 2012 inception. Other funds that track the FTSE 100 Index, another UK large cap index that is very similar to the MSCI United Kingdom, with longer records have underperformed around three fourths of the UK large-cap fund universe in the past 10 years on a risk-adjusted basis. Over this period, the MSCI United Kingdom Index has suffered from unfavorable stock exposure to the financial-services, consumer defensive, and consumer cyclical sectors.

Overall, the MSCI United Kingdom Index might not the best choice to benefit from the full potential of the UK equity market. But if one is looking simply for exposure to the largest-cap segment, this ETF is hard to fault. It charges a competitive fee of 0.20% and boasts a minimal level of tracking error, and we have a positive view of UBS and its portfolio management team. 1704 1704 Barbara Claus Barbara Claus UBS Asset Management is one of three divisions of Swiss bank UBS, which has been refocusing its business away from investment banking and towards asset and wealth management. The firm was hit hard by the financial crisis in 2008, which led to massive fund outflows and staff cuts. Consequently, UBS AM has made significant strategic and personnel changes. As part of the restructuring process started in 2014, the firm has transformed its former multiboutique structure into a more integrated platform. The product offering and investment processes were overhauled to focus on client needs and ensure repeatability. We welcome these changes and note other improvements in the past five years, mainly in relation to fee structures, performance, and manager tenure. Still, we note that the number of fund launches and closures remains high, including funds that appear to cater to short-term market trends, which is a concern and bears monitoring.

Since mid-2015, the firm has experienced some leadership turnover. In 2016, the firm's head of fixed income left. In 2017, former head of investments, Dawn Fitzpatrick, resigned as well; she has been replaced by Suni Harford. The firm's Parent Pillar rating remains Neutral, but we have a close eye on how top-level personnel turnover and product-development practices affect the firm's investment capabilities.

UBS AM has improved its structure, but high turnover on the leadership level is concerning. 2019-03-19T10:41:00 2019-03-19T15:41:00Z The fund's risk-adjusted returns over the trailing three and five years have been like the average peer in the UK large-cap equity category.

When looking at absolute returns only, during the trailing five years through November 2019, the fund's total return almost matched that of the category average. This can be largely attributed to the fund's cost advantage as the fund is underexposed to smaller companies.

Despite its bias to larger stocks, the fund's three- and five-year standard deviations are slightly higher than the category average.

It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category's cheapest quintile. Based on our assessment of the fund's People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze. F00000UHUM LiveUBS UK MSCI