5 More Under-the-Radar and Up-and-Coming Funds

A version of this article was originally published in the second-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 Manager Research added four equity strategies with long track records, but not a lot of notoriety or assets, to Morningstar Prospects this quarter. A new actively managed bond fund from Vanguard also joined the list of up-and-coming or under-the-radar investments that we are watching for possible full coverage. Not all of these funds may earn Morningstar Medalist ratings or even end up getting covered, but they are worth keeping on a watchlist.

The equity strategies new to Prospects are Hood River Small-Cap Growth, Mar Vista Strategic Growth, Mondrian International Equity, and WCM Focused International Growth. The managers of each can point to extended histories of plying their strategies at mutual funds or separate accounts.

Good and Cheap Vanguard Core Bond VCORX is brand new. The fund plies a conservative, strategy that launched in March 2016. Like its actively managed Vanguard fixed-income siblings, it follows a straightforward, benchmark-conscious approach to investing. It aims to be a high-quality, core fixed-income offering with below-investment-grade debt (including nonrated names) limited to 5% of the portfolio. It has leeway to make small interest-rate wagers and sector bets versus its benchmark--the Barclays U.S. Aggregate Bond Index. The fund's management team includes Gregory Nassour, who co-heads the firm's investment-grade credit group; Gemma Wright-Casparius, who heads up its Treasury and inflation-protected group; and Brian Quigley. Like the other actively managed bond funds that Vanguard runs itself, its very low expense ratio of 0.25% for the Investor share class obviates the need to take big risks.

A Look Under the Hood Hood River Small-Cap Growth HRSRX has been around under different names since 2002. The open-end mutual fund launched as part of the Roxbury family in 2003, but the core of its management team--Robert Marvin, Brian Smoluch, and David Swank--spun themselves off as an independent firm 10 years later. That firm, which has $800 million in assets under management, is now 100% employee-owned, though Roxbury still markets the fund. The managers, who were part of Columbia's small/mid-cap growth team and helped run Columbia Small Cap Growth before moving to Roxbury in 2002, have done well on their own, beating both the small-growth Morningstar Category average and its Russell 2000 Growth Index benchmark with less downside since the strategy's 2003 inception. The managers seek companies under $3 billion in market cap that are growing earnings and/or revenue by at least 15% in healthy industries but are either underfollowed or misunderstood by sell-side analysts. The strategy can be bold; it holds 70 to 80 stocks and can stray as much as 15% from the Russell 2000 Growth Index's sector allocations. The managers do not pay any price for growth, though; they look for median or better relative valuations and lean toward profitable, debt-light firms that generate actual cash flow. They cap position sizes at 5% to mitigate individual stock risk and are quick to sell if they think a holding's earnings will disappoint or its share price hits their target. Turnover has been consistently over 100% in the past decade. The managers, who together have about $2 million invested in the strategy, think they can run about $2 billion.

Moats at a Reasonable Price A team of four who have worked together for more than a decade run Mar Vista Strategic Growth RMSIX MVSGX. Similar to Hood River, they founded Mar Vista Investment Partners in 2007 but had previously worked at Roxbury Capital, which still provides back-office services. Co-founders Silas Myers and Brian Massey have managed separate accounts in this conservative large-growth approach since 2004 when they were still at Roxbury and launched the eponymous fund in 2011. They run a compact portfolio of 30-50 companies with durable competitive advantages and high returns on invested capital that trade at significant discounts to their estimates of fair value. The portfolio tends to have a bigger stake in companies that Morningstar equity analysts think have big competitive advantages, or wide moats, than both its typical peer and the Russell 1000 Growth Index. It also tends to have higher average returns on invested capital and equity. The strategy typically keeps pace in rising markets and gains an edge in tough times. In 11.5 years at the separate account and 4.5 years at the fund, the strategy has surpassed most of its peers as well as the Russell 1000 Growth Index on a risk-adjusted basis, as measured by Sortino and Sharpe ratios. Total returns are also strong over the history of the separate account. The team runs about $2 billion total in the strategy.

More Macro Than Most Mondrian International Equity DPIEX is an intriguing choice that has a long history and experienced managers. It has a new name, having been known as Delaware Pooled Trust International Equity until March 2016, but the same managers and analysts remain in place using the same cautious strategy. They place a lot of emphasis on defense, hoping to minimize the damage when markets fall, accepting the trade-off that the fund won't perform as well as the market during rallies. These managers place more emphasis on macroeconomic forecasting when making investment decisions than most international-fund managers. They estimate that about 40% of their decision-making is macro-based, with the other 60% being company-specific. They don't invest much in companies domiciled in emerging markets, with that stake typically hovering around 5% of assets, and they only hedge currencies against the U.S. dollar when they consider a currency's value to be extremely over- or undervalued based on its history and other factors. This approach has allowed the fund to post top-quartile returns in the foreign large-value category for the trailing three-, five-, and 10-year periods through July 31, 2016, with lower volatility than the average fund in that group. The fund has also topped the MSCI ACWI ex USA over all three periods. The fund's turnover was just 28% in 2015, the result of a long-term focus.

Avoiding Moat Decay WCM Focused International Growth WCMRX, which is available in two mutual fund share classes as well as separately managed accounts, has several factors in its favor. Comanagers Michael Trigg (a former Morningstar equity analyst), Peter Hunkel, Paul Black, and Kurt Winrich are seasoned and skilled, and they have a solid support team. The managers take a sound and exacting approach to investing in large caps abroad. They insist that all of their picks have durable and growing competitive advantages, superior corporate cultures, enduring tailwinds such as favorable demographic trends, and other positive attributes. They focus on 30-35 stocks and move at a measured pace. The aggregate portfolio is always quite distinctive as well, with high net margins; superior returns on equity, assets, and invested capital; and atypical geographic and sector positioning. What's more, because of the managers' quality bias and strong security selection, the strategy has generally held up very well in downturns and incurred relatively limited volatility overall. Although it has lagged in certain rallies, the strategy has outperformed in others, and the mutual fund, which opened in mid-2011, and the separate account, which opened in late 2004, have handily outgained their typical foreign large-growth category rivals and the MSCI ACWI ex USA on both a total-return and risk-adjusted basis since their inceptions. In addition, the expense ratios of both share classes of the mutual fund have declined considerably, though they remain pricier than average.

Sarah Bush, Greg Carlson, Gregg Wolper, and Bill Rocco contributed to this report.