Undiscovered Managers Behavioral Val C UBVCX

Fees are a weakness here. The strategy's lofty fees are a high hurdle to clear, as it is priced within the highest quintile among peers.

The strategy's managers invest alongside shareholders, which helps it earn a High People Pillar rating. The strategy's effective investment approach earns an Above Average Process Pillar rating. Low quality exposure is attributed to stocks with higher financial leverage and lower profitability. And a high yield exposure is rooted in holding high dividend-paying or buyback stocks. The strategy's parent organization earns the firm an Above Average Parent Pillar rating, and this rating is inherited from vehicles belonging to the same branding entity and is indirectly assigned by an analyst.

Undiscovered Managers Behavioral Val Fd earns an Above Average Process Pillar rating.

The leading factor in the rating is the fund's strong long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category index, which suggests that the managers have shown skill in their allocation of risk. The parent firm's five-year risk-adjusted success ratio of 57% also contributes to the process. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median Morningstar Risk-Adjusted Return for the period. Their noteworthy success ratio suggests that the firm does well for investors and that this fund may benefit from that. Lastly, the process is limited by being an actively managed strategy. Historical data, like Morningstar's Active/Passive Barometer, finds that actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons.

This strategy, over time, has consistently held more undervalued companies, compared with peers in the Small Value Morningstar Category. But in terms of size exposure, it is similar to the average. Examining additional factor exposure, this strategy tilts consistently toward stocks with lower quality or the shares of companies with more financial leverage and lower profitability, compared with Morningstar Category peers over the past few years. Such positions do not tend to provide much ballast for a portfolio. In the latest month, the strategy was also less exposed to the Quality factor compared with Morningstar Category peers. This strategy's portfolio also has had exposure to more stocks with high dividend or buyback yields over peers in these years. High-yield stocks tend to be connected to more mature companies earning enough cash to return some to shareholders. At times, however, extreme market pressure can force them to cut their dividends, which hurts stock performance. Compared with category peers, the strategy also had more exposure to the Yield factor in the most recent month. Additionally, this strategy has demonstrated a bias away from momentum stocks during these years. Momentum investors tend to expect stocks that have done well recently to continue to do so in the short term. Momentum approaches can entail higher turnover and trading costs since the top stocks can often change. In recent months, the strategy also had less Momentum factor exposure than its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section.

The portfolio is overweight in financial services and utilities relative to the category average by 14.7 and 3.4 percentage points, respectively. The sectors with low exposure compared to category peers are technology and industrials, underweight the average by 7.0 and 3.6 percentage points of assets, respectively. The strategy owns 96 securities and is relatively concentrated. In particular, 30.7% of the fund’s assets are housed within the top 10 holdings, as opposed to the category’s 28.1% average. And finally, in terms of portfolio turnover, on a year-over-year basis, 39% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

The main contributor to the rating is its parent firm's five-year success ratio of 57%. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median return for the period. The rating is also improved because at least one manager has invested more than$ 1 million in the strategy, which aligns their interests with fundholders. The portfolio managers' outperformance at the funds they run, as measured by their combined three-year manager excess returns, supports the rating further.

David M. Potter, the longest-tenured manager on the strategy, boasts 19 years of listed portfolio management experience. The average Morningstar Rating of the strategies they manage is 3.8 stars, demonstrating above-average risk-adjusted performance compared to category peers. David M. Potter has an experienced listed co-manager. Together, they average 13 years of listed portfolio management experience.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

Over a 10-year period, this share class outperformed the category’s average return by 1.7 percentage points annualized. And it also outperformed the category index, the Russell 2000 Value Index, by an annualized 1.9 percentage points over the same period.

The risk-adjusted performance only continues to make a case for this fund. The share class led the index with a higher Sharpe ratio, a measure of risk-adjusted return, over the trailing 10-year period. Notably, these strong risk-adjusted results have not come with more volatility for investors. This strategy took on similar risk as the benchmark, as measured by standard deviation. However, the share class proved itself ineffective as it was unable to generate alpha, over the same 10-year period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

This share class imposes a fee that places it in its Morningstar Category's highest quintile. Despite this fee, the fund’s People, Process, and Parent Pillars build confidence that this share class should be able to generate positive alpha versus its category benchmark, resulting in a Morningstar Medalist Rating of Silver.