4 Newly Rated Funds to Consider

Susan Dziubinski: Hi. I'm Susan Dziubinski with Morningstar. Morningstar's manager research team maintains a list of up-and-coming and under-the-radar strategies that they call Morningstar Prospects. Joining me today to discuss four prospects that have just recently come under full coverage is Nick Goralka. Nick is an analyst with Morningstar's manager research team. He's also the editor of the semiannual Prospects report. Nice to see you today, Nick.

Nick Goralka: Thank you for having me, Susan.

Dziubinski: Let's start out with a little bit of background on how the team selects strategies to include on the Prospects list.

Goralka: As you mentioned, the Prospects list is a list of up-and-coming or under-the-radar strategies, which inherently means it can be difficult to find strategies that fall under those parameters. The manager research team does have some filterable qualities that they like to look for in strategies that do receive full coverage. For example, they might look for strategies that receive Morningstar Quantitative Ratings of Gold or perhaps strategies that have very good manager tenure, excellent recent performance, or something along those lines--low fees is another example--to help weed through the long list of actively managed strategies.

Dziubinski: What's the difference, Nick, between a fund or a strategy that we consider a prospect and a fund that we then have full analyst coverage under?

Goralka: Prospects don't receive full analyst coverage, which means they're perhaps updated slightly less regularly, and there's less due diligence done upon them, just because there might be some unanswered questions. With a full Morningstar Analyst Rating, that is an indication of how the manager research team expects a strategy to do over future market cycles, after fees, compared to its competitors and its category or relevant benchmark.

A prospect may not receive full coverage because analysts still have outstanding questions on the merits of the strategy. For example, perhaps a manager who had led it for a long time just departed, and we're not sure just how well that the new managers will be able to do without him. A prospect is a strategy, usually that the manager research team still has some questions around.

Dziubinski: We recently have four prospects that did, what we call, graduate and came under full analyst coverage. Let's talk a little bit about some of those strategies today. The first is Baron Global Advantage, which is a world-stock fund. Tell us what this fund's new Analyst Rating is and what we think about it.

Goralka: All share classes of this strategy receive a Bronze rating. And just to remind folks, the Morningstar Analyst Rating differs now based on the fee of the share class in question. Sometimes a cheaper share class of a strategy will receive a higher rating because, going back to my previous point, the Morningstar Analyst Rating is our assessment of strategies after fees. But all share classes of this strategy, Baron Global Advantage, receive a Bronze rating, as you mentioned, which means we do expect some outperformance going forward.

The manager's aggressive growth approach has been buoyed by stylistic tailwinds, which gives us a little bit of pause. But at the same time, those tailwinds don't explain the performance that that strategy has seen since its inception, even though 2022 has been off to a very rough start for this strategy, as well as other aggressive growth strategies. The manager also has a very large team supporting him, which we always like to see. And it seems to be a stable group of experienced people lending their hands. Overall, it's a promising strategy.

Dziubinski: Our next fund that's recently come under full coverage is JPMorgan International Hedge Equity. What makes that fund tick, and how do we rate that one?

Goralka: That strategy's cheapest share classes receive a Silver rating, whereas more expensive share classes receive Bronze and Neutral ratings. Investors should always be conscious of the exact fee of the product they're purchasing before making the decision to do so.

But that aims to provide smoother equity returns with a very straightforward options strategy that involves trying to mitigate dramatic swings in returns that might be caused by volatile equity markets, like we've seen the past couple weeks. That's a great example. It's led by a manager that has decades of experience and a support team we like. Overall, if investors are paying the right price for that strategy, we think it's a good one.

Dziubinski: Next up is MFS Mid Cap Value, and its cheapest share classes earn a Silver rating. What do we like about this graduate?

Goralka: We really like the deep pool of MFS analysts. We have a positive opinion of others strategies provided by that firm. This one focuses on companies with durable business models, but it also takes what they consider to be a more opportunistic approach than some other MFS strategies. They might be hunting for companies that have specific catalysts on the horizon or companies that are consolidating within their industry and adding market share that way to an extent that other MFS strategies might not. It's also, interestingly, one of the largest mid-cap value strategies that is actively managed. We're not the only ones that see merit there.

Dziubinski: And then lastly, there's Parametric Volatility Risk Premium--Defensive. What do we like here, and what's its Analyst Rating?

Goralka: This is another pretty straightforward option-selling strategy. They sell options to generate income and to potentially mitigate the risk that you might expect over the course of a regular equity market cycle. As will most volatility-selling strategies, it will potentially not do well in volatile periods like we've seen over the last couple weeks. But the strategy they employ of diversifying the contract length as well as the frequency of them allows them to recover quickly and not completely blow up when volatility expands like we've seen in the last couple weeks. That's a promising strategy as well.

Dziubinski: Nick, what's the rating been on that one?

Goralka: That one's only share class receives a Morningstar Analyst Rating of Bronze.

Dziubinski: Well, Nick, thank you for your time today and for walking us through some of these new Analyst Ratings on these funds that have recently graduated to full coverage. We appreciate your time.

Goralka: Absolutely, Susan. Thank you for having me.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.