Morningstar

BGF Euro Bond A4 GBP

Analyst Report
Morningstar's Take
|20/06/2024
by Evangelia Gkeka
On April 9, 2024, BlackRock announced that Michael Krautzberger, head of the EMEA Fundamental Fixed Income team, is leaving the firm in June 2024 after 19 years to pursue another opportunity.

Krautzberger was lead manager on the BGF Euro, BSF Sustainable Euro, BGF Euro Short Duration Bond funds, and the BSF Sustainable Fixed Income Strategies fund, which Morningstar analysts rate. As a result of this announcement, we have placed these funds Under Review while we evaluate the upcoming change to the investment team.

BlackRock announced that existing members on the team will take over Krautzberger’s portfolio management responsibilities across the range of strategies he was managing. With immediate effect, Georgie Merson will join Johan Sjogren and Giulia Artolli to manage the BGF Euro Short Duration Bond fund. Merson and Artolli will join Ronald van Loon to manage the BGF Euro Bond Fund and the BSF Sustainable Euro Bond fund. There will be no addition to the portfolio management team of the BSF Sustainable Fixed Income Strategies fund. After Krautzberger’s departure, Sjogren and Tom Mondelaers remain in place as portfolio managers.

BlackRock also announced that Simon Blundell will be Krautzberger's successor as head of European Fundamental Fixed Income and will report to Rick Rieder, BlackRock’s chief investment officer of global fixed income. Blundell was most recently head of Sterling bond strategies at BlackRock and boasts three decades of experience.
 
BGF Euro Bond has been affected by significant changes within BlackRock’s fundamental euro fixed-income team, leading to a downgrade in the People Pillar rating. We have also downgraded the Process Pillar rating as we seek confirmation that the new team will uphold the same disciplined approach demonstrated by the previous team.

The team turnover within BlackRock’s fundamental euro fixed-income team that took place in recent months and the changes at the helm of BGF Euro Bond Fund that came into effect on April 9, 2024, have reduced the average experience level of the team and increased the remaining members’ workload. We have downgraded the People Pillar Rating to Average from High.

We recognize that the process has a number of differentiating characteristics and flexibility, but we would like to get confirmation that the new portfolio management team will continue to execute the process in the same disciplined and successful manner without the oversight of their predecessor. We therefore downgraded the Process Pillar rating to Above Average from High.

Michael Krautzberger had been managing the strategy from October 2005 to April 2024 when his departure was announced. Since August 2019, Ronald van Loon has become comanager in recognition of his contribution to the investment process. Van Loon has been a member of the team for 13 years and is also managing institutional aggregate mandates. He remains in place here after Krautzberger’s departure. His experience in working with Krautzberger and managing global fixed-income portfolios, as well as working as part of large fixed-income teams, is particularly relevant.

There were two additional departures affecting the fundamental euro fixed-income team but not the manager lineup of this strategy. In March 2024, BlackRock announced the departure of Chris Allen, a portfolio manager specializing in euro and inflation-linked portfolios who left after 20 years at the firm. In May 2024, BlackRock also announced the departure of Tom Mondelaers, a member of the team for 22 years and head of euro and global credit portfolios.

Following the departures, Georgie Merson, who joined BlackRock in 2014, specializes in investment-grade credit, and has been comanager of BGF Euro Corporate Bond since October 2021 (and of its sustainable sister fund since June 2021), has been added as comanager here in April 2024. Giulia Artolli was also added as comanager in April 2024 in recognition of her contribution to the strategy over the years. She joined BlackRock nine years ago and is specializing in rates, covered bonds and SSA, and aggregate.

Simon Blundell, head of sterling bond strategies up until recently, is replacing Krautzberger as head of BlackRock’s fundamental euro fixed-income team, allowing the portfolio managers to focus on their investment activities without having to spend time on team managerial responsibilities.

The investment approach centers on building a portfolio of diversified risks and adding value in a consistent, incremental manner through a broad range of primarily relative-value strategies. The managers are cognizant of the benchmark but are willing to shift asset allocation in response to his views, though kept in check by the strategy's tracking error, which usually ranges from 0.7% to 2.0%. The portfolio is typically diversified and includes 40-60 relative value investment ideas at a time.

Over 2021-22, returns have been below peers. A short UK inflation position, short US duration, and long emerging-markets government bonds detracted in 2021. Moreover, during a very difficult 2022, the strategy underperformed peers by 4.3% but was just ahead of the Morningstar Category index. This underperformance was mainly driven by the lower duration of funds within the peer group. Moreover, the strategy’s attempt to find diversification from high-conviction safer market segments such as government bonds and covered bonds also didn’t work in 2022, as they recorded significant losses. Last, a short in UK inflation in the first quarter of 2022 was another detractor.

In 2023, relative performance improved as the fund outperformed peers by 1.5% and the category index by 0.9%. Tactical duration management and various over- and underweightings in European government bonds helped (long Spain versus France, Italy, and Germany, long Italy versus Germany, long Greece, Cyprus, and Slovenia), as did an overweighting in banking within investment-grade credit and allocations to securitized and high-quality covered bonds.

Over the long term, the fund has generated consistent returns outperforming both its peers and category index. The breadth of added value across virtually the entire range of underlying ideas employed in the portfolio is impressive and highlights the quality of ideas generated by the team and their ability to blend the positioning into a coherent portfolio.
 
Morningstar Medalist Rating™Recent turnover leads to People and Process downgrades.
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Morningstar Pillars
PeopleAverage
ParentAbove Average
ProcessAbove Average
 
Morningstar Medalist RatingMorningstar assigns the Medalist Rating to funds that are qualitatively and quantitatively assessed through manager research and algorithmic processes. The assessment turns on three key “pillars” – People, Process, and Parent – that yield an estimate of how well a fund will perform before fees but after adjusting for risk.
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