A star manager now on his own, a multifaceted alts fund, and a bold global growth vehicle are among the highlights.
A version of this article was originally published in the first-quarter 2017 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 six new strategies in the first quarter of 2017. Here's a look at five of them.
Former Manager of the Year Starts His Own Firm
Rajiv Jain, the manager of GQG Partners Emerging Markets Equity GQGIX, left his previous employer, Vontobel, in March 2016 after accumulating an impressive record at several funds, including Virtus Vontobel Emerging Markets Opportunities HIEMX. Jain started his own firm, GQG Partners (which stands for global quality growth), and launched this fund in late December. None of Jain's analysts at Vontobel have followed him to GQG Partners; rather, he has built a new, compact analyst team, all based at GQG's headquarters in Fort Lauderdale, Florida.
Jain says this fund will have the same strategy as his previous charge, which means it will likely be packed with steady growers that dominate a niche or a market, and that he won't worry if country and sector weightings differ greatly from those of indexes or other emerging-markets funds. While at Vontobel, Jain's funds usually held up much better than peers when markets declined. He typically had heavy overweightings in the consumer goods sector and in India, but he says he has cut both sharply in this portfolio, arguing that many of the consumer goods stalwarts he once liked now post meager growth rates and are overpriced because investors have been attracted to their dividends.
This fund is very small, but Jain says GQG has attracted well over $1 billion to institutional accounts that mirror this and his other charges. Jain expresses a commitment to keeping the expense ratio below the median and says he will close this fund to new investors when the fund and related institutional accounts reach $10 billion in assets.
Concentrated Global Growth
Morgan Stanley Institutional Global Opportunity MGGIX employs a bold, focused approach to global investing. The fund has been skippered by Kristian Heugh since its May 2008 inception. Heugh, who joined Morgan Stanley in 2001 and trained under veteran Morgan Stanley growth manager Dennis Lynch, leads a team of four investors based in Hong Kong. Heugh's approach is straightforward: He seeks to buy the highest-quality growth companies across the globe and does so with high conviction. Heugh usually invests over half of the fund's assets in the top 10 positions and tends to own 40-50 stocks. Key to Heugh's process is determining a company's key sustainable competitive advantage and then determining how this advantage can be monetized through growth. While the fund has sizable exposure to U.S. stalwarts such as Facebook FB and Amazon.com AMZN(two of the fund's top three holdings as of March 2017), it also delves into private companies such as Uber and Airbnb. Heugh leverages the experience of his investment team, all of whom are fluent in local Chinese languages, to uncover firms such as TAL Education Group TAL, a Chinese firm that offers math and science tutoring services in mainland China and was the fund's leading contributor to performance in 2016.
Heugh's concentration and approach have thus far been beneficial for investors. From its May 2008 inception through May 2017, the fund's 12.3% annualized return trounced the 4.2% annualized return of the MSCI All Country World Index and 4.5% of the average fund in the world large-stock Morningstar Category. Heugh's approach has resulted in well above-average volatility, and the fund's fee is merely average, but his track record is impressive.
A Wide-Ranging Alts Fund
Oppenheimer Fundamental Alternatives QVOPX is a multistrategy fund that takes a discretionary, macro-driven approach. It aims to produce low volatility and relatively low correlations to stocks and bonds, and to outperform the HFRX Global Hedge Fund Index. Michelle Borrè took over management of this fund in November 2011. She had previously worked as an analyst on this fund from 2003 to 2009, and she has also served as portfolio manager of Oppenheimer Capital Income OPPEX since 2009. Borrè is backed by five analysts focused on this strategy: Daryl Armstrong, Robert Herz, Jay Merchant, Timothy Mulvihill, and Brian Giesen.
The fund has undergone significant strategy changes over time. The current approach can be traced back to April 2012, the point at which Borrè fully implemented the portfolio after taking charge of the fund. Previously, the fund had been higher-beta, and its alternative characteristics were chiefly derived from long-short equity exposure. Currently, Borrè and her team oversee three separate sleeves: long-short equity, long-short credit, and global macro (which may include commodities, currencies, and rates). But the managers begin with a top-down view, developing 10 or so broad macroeconomic themes through which they will filter their trade ideas. In doing so, they take a two- to three-year outlook, searching for market or sector imbalances that they think are unsustainable and where prices are reasonable. Trade ideas are presented by analysts at weekly meetings, during which the analyst must discuss potential risk and return, the fundamental rationale, and bull and bear cases for the idea. Allocation across the three buckets is driven by asset-class valuations as well as the perceived opportunity set.
An independent risk team backs up Borrè’s team with regular risk tests on the portfolio. The highly discretionary nature of the investment process, along with the relatively concentrated thematic approach, does introduce some idiosyncratic risks to the strategy.
A Long-Tenured Manager Flies Under the Radar
Tributary Small Company FOSCX boasts a veteran lead manager and a strong record. Mark Wynegar, who has managed the fund since 1999, is backed by a team of six that includes comanager Michael Johnson (who has been in his current role since 2007). The team generally looks for good businesses at a fair price; it is a Buffett-like take on value investing (rather than deep value), which includes fairly long holding periods--portfolio turnover has typically ranged from 20% to 30%. The team aims for above-average returns with below-average risk and diversifies the portfolio across 60-70 stocks. The fund tends to gain its biggest edge over its category peers and Russell 2000 benchmark in sideways and down markets, while often lagging in big rallies led by economically sensitive fare (as it did in 2013). Fees are essentially average--the institutional share class has a minimum investment of just $1,000, and its expense ratio is slightly below the median for no-load small-cap funds (the most appropriate comparison group). The fund has surpassed more than 90% of its small-blend peers and the index on both a total-return and risk-adjusted basis during Wynegar's tenure. The managers run a total of $1.1 billion in the strategy and expect to close it to new investors when it hits $1.5 billion.
A Conservative Approach to Small-Cap Stocks
The four-member management team of Westwood SmallCap WHGSX has largely been stable for the past six years. The comanagers employ the same value-with-a-quality-tilt strategy shared by Westwood's 14 other analysts and managers. They look for financially conservative small-cap companies where return on invested capital is high and upside potential outweighs downside risk. One of Westwood's sector research groups challenges each investment idea before the comanagers can add it to the 55-70 stock portfolio. The fund caps holdings at 3% and sector weightings at 25% of net assets. Stock-picking drives sector allocations, but the fund has some notable biases relative to the Russell 2000 Value Index, including overweightings in industrials and real estate and underweightings in financials and technology. Portfolio turnover isn't low, but performance has been impressive so far. The fund beat the benchmark and 97% of small-blend funds from year-end 2010 through May 2017. The fund's 1.10% net expense ratio is also reasonable, given its low minimum investment and modest asset base.