4 New Investment Strategies on Our Radar
Strong fund managers and processes drive these additions to the Morningstar Prospects list.
Morningstar Prospects, a list of up-and-coming or under-the-radar investment strategies that Morningstar Manager Research thinks might be worthy of eventual full coverage, added 10 new strategies in the first half of 2021.
Here's a look at some of the strategies that the team added to the July 2021 list and what each has to offer. Morningstar Direct and Office clients can find the full manager research prospects report here.
Dodge & Cox Emerging Markets (DODEX)
Dodge & Cox Emerging Markets Stock has some hallmarks of a Dodge & Cox strategy, but it ventures into new territory. The mutual fund, launched in May 2021, adopts the firm’s prudent investment committee structure. Key members include CIO Charles Pohl; director of international equity Diana Strandberg; and China-focused analyst Sophie Chen. The strategy also draws upon a proven, valuation-driven approach which has produced solid emerging-markets picks for Dodge & Cox International Stock (DODFX). Unlike the firm’s other offerings, however, this one relies on a quantitative model—developed by committee member Robert Turley—to find attractive stocks. The firm’s vaunted analyst team doesn’t dive deeply into the model’s recommendations; it simply checks if those stocks meet the team’s expectations for valuation, management, and business prospects. The resulting portfolio has 200-plus holdings, much more than the typical Dodge & Cox equity strategy. It’s worth watching how Dodge & Cox handles its new quant tool and its effect on analysts’ workloads, but the firm has had success with every fund launched in its 91-year history. Investors are paying a fair price as the fund gets going: Like all Dodge & Cox mutual funds, its expense ratio lands in its peer group’s cheapest quartile.
Pimco Global Core Asset Allocation (PGAIX)
Pimco Global Core Asset Allocation is driven by a promising team. Despite longtime lead manager Mihir Worah’s departure in 2019, the fund remains in skillful hands. Erin Browne, Pimco’s head of asset allocation, took the lead at the end of 2019 but has been listed as a portfolio manager since the beginning of that year. She also serves as the lead manager on the Pimco RealPath Blend target-date series (with a Morningstar Analyst Rating of Gold). Browne is supported by two comanagers, Geraldine Sundstrom and Emmanuel Sharef.
The process involves collaboration with the firm’s well-established investment committee, which builds out the long-term capital market assumptions utilized by this fund. The managers then tactically tilt the portfolio across global asset classes based on what they find most attractive on a relative-valuation basis. They pull together sleeves from across the firm’s offerings and customize each one to ensure they are not highly correlated with each other and do not tack on additional unwanted risks to the portfolio.
Browne’s short tenure on the fund has been impressive. Since taking the lead in December 2019, the fund’s annualized return of 15.8% through June 2021 topped its custom benchmark (60% MSCI ACWI/40% Bloomberg Barclays Global Aggregate Hedged), its average world allocation peer, and its Morningstar Category index (Morningstar Global Allocation).
BlackRock Income (BMSIX)
BlackRock Income is a notable proposition within the multisector bond category. This offering’s flexible approach leverages the same resources and philosophy that back Gold-rated BlackRock High Yield Bond (BRHYX). Since July 2016, the strategy has been led by Jeff Cucunato (head of multi-strategy credit) with the support of James Keenan (CIO and co-head of global credit), Mitchell Garfin (co-head of U.S. leveraged finance), Jose Aguilar (European high-yield manager), and Arthur Piasecki (Asian credit manager). The quintet can also count on three additional senior portfolio managers, over 80 research professionals across the globe, and the firm’s impressive resources.
The team aims to achieve consistent and attractive risk-adjusted results throughout the credit cycle by dynamically investing across global credit markets. The investment universe is relatively broad, ranging from collateralized loan obligations and other securitized assets, to investment-grade and high-yield corporates, emerging markets, and bank loans. Consequently, the strategy’s benchmark is an equally weighted blend of four indexes: Bloomberg Barclays Global High Yield USD Hedged, S&P/LSTA Leverage Loan, JPM Corporate EMBI Broad Diversified, and Bloomberg Barclays U.S. Investment Grade CMBS.
Over Cucunato’s tenure through June 2021, the strategy has delivered strong returns, ranking ahead of 85% of its (distinct) peers with a lower volatility than 60% of them. As such, its risk-adjusted performance, as measured by Sharpe ratio, lands in the category’s best third over the same period.
Morgan Stanley Developing Opportunity (MDOEX)
Morgan Stanley Developing Opportunity, manager Kristian Heugh’s latest offering, has a strong pedigree. Launched in February 2020, the strategy comes off Heugh’s tremendous success with his flagship Morgan Stanley Global Opportunity (MGGIX), which graduated from Morningstar Prospects in June 2019 and whose cheapest share classes earn Bronze ratings. Heugh also oversees several other mandates, including Bronze-rated Morgan Stanley International Opportunity (MIOIX).
This strategy leverages Heugh’s characteristic enterprising approach. Heugh is an unabashed growth investor, targeting firms capable of capturing large addressable markets with sustainable, organic revenue growth and high-margin business models. As such, he tends to tread lightly in industries that require significant capital expenditures, instead focusing on the consumers, technology, and financials sectors. Heugh, based in Southeast Asia, has long been an investor in Chinese growth opportunities, and this strategy has also counted heavy exposure to Chinese firms since inception.
The strategy’s short life span and differing mandate warrant additional monitoring. Though the strategy set a blistering pace out of the gate—its 32.1% annualized return through May 2021 topped the MSCI Emerging Markets Growth’s 25.2%—its record spans less than two years. The emerging-markets universe also further stretches Heugh’s seven-person team, which now oversees seven distinct strategies. Granted, Heugh’s selections in China, India, and other Southeast Asian markets have been exceptional. Yet whether Heugh and company can carry over that same remarkable execution to this strategy’s broader mandate is an outstanding question.
Nicholas Goralka does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.