Some alternative and traditional equity ideas.
A version of this article was originally published in the third-quarter 2016 edition of Morningstar Prospects, which highlights promising managers that Morningstar Manager Research analysts currently do not cover but may cover in the future. The full list and publication are available to subscribers of Morningstar Direct.
Morningstar Prospects--a list of up-and-coming or under-the-radar investment strategies that Morningstar Manager Research thinks might be worthy of full coverage someday--added five new funds in the third quarter of 2016. Here's a look.
American Beacon AHL Managed Futures Strategy AHLIX is subadvised by Man AHL, one of the largest firms in the alternative investment industry, with $78.6 billion in assets under management and a 25-year track record in systematic strategies. This fund is managed by Matthew Sargaison and Russell Korgaonkar. Sargaison is the CIO of AHL Partners and served as chief risk officer between 2009 and 2012. Korgaonkar joined AHL in 2001 and moved to his current role in March 2011. The managers are backed by 88 investment professionals who specialize in trading strategies and model development.
AHL's process employs momentum-based, 100% systematic trend-following models. These models profit from sustained trends in rallying or declining markets. They rely on technical (price) and fundamental (interest rates) data, which are combined to generate signals in each of the 80 traded markets. There are three fundamental and 18 momentum signals with weightings from negative 2 to positive 2. Once specific market positions are suggested by the models, they go through a number of risk filters such as liquidity, position limits, and volatility before a target portfolio is constructed. The fund's risk-management function monitors portfolio-level risk using a number of measures such as exponentially weighted volatility. In addition, the fund will give a greater weighting to implied volatility to cut back positions during periods when implied and realized volatility diverge substantially (as they did around the Brexit vote).
The fund allocates 20% to 30% to each of four asset classes: equities, fixed income, commodities, and currencies. The final allocations are determined by a mean-variance optimization process that aims to generate strong risk-adjusted returns by maximizing diversification benefits among the 80 markets traded. Since its August 2014 inception, the fund has returned 3.7% annualized through Oct. 31, 2016, outperforming its managed-futures Morningstar Category average of 2.4% during that span.
Cash Flow Fan
American Beacon SGA Global Growth SGAGX has flown under the radar for nearly six years. This concentrated world-stock fund has $17 million in assets and focuses on stocks that deliver long-term, risk-adjusted returns. Comanagers George Fraise, Gordon Marchand, and Rob Rohn invest in established large-cap firms with what subadvisor Sustainable Growth Advisers calls strong levels of cash flow available to shareholders--a conservative variant of free cash flow. The three have overseen this fund since its inception in 2010, and each has over $1 million invested in the strategy. The team deploys similar stock-picking techniques at John Hancock U.S. Global Leaders Growth USGLX, which focuses on U.S. stocks. The fund is concentrated with 34.7% of assets in its top 10 holdings but limits risk by building positions gradually and limiting top holdings to between 4% and 6% of assets. Fraise, Marchand, and Rohn have an average of 32 years of experience and are in their 50s and 60s, but they have a succession plan in place. Beginning at age 65, SGA requires all employees to sell back to the firm their equity stake over a five-year period. The next generation of leadership includes three current senior research principals--Tucker Brown, Alexandra Lee, and Kishore Rao.
Amit Wadhwaney, former manager of Third Avenue International Value TAVIX, is back with a new global value equity strategy, Moerus Worldwide Value MOWIX. Wadhwaney and former Third Avenue colleagues John Mauro, Michael Campagna, and Ian Lapey employ the same deep-value approach they used at their old charge, which was a Morningstar Medalist during their tenure. Fees are above the world-stock category average at 1.40% for the institutional shares and 1.65% for the retail share class. The fund, however, launched in May 2016 and is still very small. It's worth watching, though, because of Wadhwaney's unique style and ability to deliver competitive risk-adjusted returns, albeit with frequent fallow periods, in 13 years at Third Avenue International Value. From its Dec. 31, 2001, inception to Wadhwaney's June 2014 departure, the fund's 10.0% annualized gain kept pace with the foreign small/mid-value category's 10.2% and the MSCI World ex USA SMID Index's 10.4%. The fund's Morningstar Risk-Adjusted Return of 5.4%, however, beat the respective 4.4% and 4.8% marks for the peer group and benchmark.
This owes to Wadhwaney's deep-value philosophy. Like Third Avenue founder and former colleague Marty Whitman, Wadhwaney seeks stocks with wide margins of safety, or steep discounts to his estimates of what the underlying companies' assets would fetch in liquidation. This often leads Wadhwaney into beaten-up and difficult-to-analyze areas such as South American retailers, Asian warehouses, North Sea energy companies, and Canadian uranium producers. Moerus Worldwide Value will be global, all-cap, and concentrated (25 to 50 holdings). It also will hold cash if opportunities are scarce. That's similar to Wadhwaney's approach at Third Avenue, only here he says he might delve deeper into emerging markets.
Perkins International Value JIFIX hit its three-year anniversary in April 2016. At just $12.4 million in assets, it's still under the radar. However, there are reasons to be optimistic. Manager Greg Kolb is a known quantity. He runs Perkins Global Value JGVAX, a fund with a Morningstar Analyst Rating of Bronze. He's been involved with the fund since 2005 when it was called Janus Global Opportunities. In 2010, the world-stock fund and Kolb moved to Janus' value-oriented subsidiary, Perkins Investment Management, where the fund changed names and refined its process to better match the risk-conscious approach that Perkins' U.S.-focused funds have long used successfully.
Kolb, now also CIO of Perkins, focuses on how much a potential holding could lose before considering possible gains, taking a patient, low-turnover approach. Portfolio candidates must have strong free cash flows, healthy balance sheets, and reasonable valuations. However, the portfolio has looked a bit pricier than the MSCI EAFE on traditional valuation metrics recently, as Kolb isn't overly willing to sacrifice quality for bargain prices. The portfolio, typically 65-75 holdings, has some sector preferences, including consumer staples, telecom, and industrials, while it has been light in financials. Cash has ranged from 6% to 16% of assets, though it's been on the lower end recently. Perkins has lost two members of the international team during the past year, so turnover is worth watching. However, Kolb has been a steady presence, and his investment of over $1 million in this fund is encouraging.
Long Track Record
An experienced management team guides Eagle Mid Cap Growth HAGIX. Strategy architect and lead portfolio manager Bert Boksen founded the strategy in 1998, modeling it after a successful small-cap growth approach he's run since 1995. Boksen, a 40-year industry veteran, is supported by a pair of portfolio comanagers, Eric Mintz and Christopher Sassouni, in addition to three seasoned investment analysts. The team seeks out mid-cap stocks that grow their earnings at a rapid rate but trade at reasonable valuations. The team targets an earnings-growth rate of 20% in its prospective stocks, in addition to positive market catalysts and experienced, invested management teams. The resulting portfolio tends to own between 80-100 stocks and generally sticks closely to the sector allocations of its Russell Midcap Growth benchmark, in an effort to focus on stock selection. The fund keeps its turnover below the average mid-cap growth fund's and is aided by below-average expenses. Boksen's approach has produced strong returns over his tenure. The fund's longer-term trailing returns rank in the top quartile of peers.
The team runs about $2 billion in this strategy, including $1.4 billion in the mutual fund. St. Petersburg, Florida-based Eagle Asset Management is a wholly owned subsidiary of Raymond James Financial. Boksen has over $1 million in the fund, Mintz has between $10,001 and $50,000 in the fund, and Sassouni invests between $100,001 and $500,000.