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Morningstar Prospects: Where to Find Under-the-Radar Funds

Our report on the latest hidden gems and promising investment strategies

Greg Carlson

 

Twice a year, we publish a list of several dozen up-and-coming or under-the-radar investment strategies that are not currently covered by Morningstar Research Services’ manager research group but might be in the future. Consider this report a list of what we believe to be hidden gems and promising strategies.

Here are some details about the Morningstar Prospects list and how it comes together:

How the Morningstar Prospects list is created

The manager research team conducts significant due diligence to uncover new strategies for the list. The team screens the investment universe and speaks to portfolio managers and other industry contacts to glean ideas. The team then vets each candidate for Morningstar Prospects before it can be added to the list.

These investment strategies typically fall under one of several headings: under-the-radar managers, new funds run by experienced managers, or a unique investment process.

What makes the Morningstar Prospects list wide-ranging

While most are actively managed traditional mutual funds, many of these strategies are also available as separate accounts and/or collective investment trusts. The list also features passive strategies in both traditional and exchange-traded form. And several approaches that carry a focus on environmental, social, and governance (or ESG) factors currently make the cut.

While the team generally chooses investment strategies it expects to outperform over the long term, some can be noteworthy for reasons other than conviction in future performance. For instance, the funds may pursue an interesting strategy or have gathered a large sum of assets in a short period.

Why some investment strategies roll off the list

Strategies graduate to full coverage when the team is comfortable assigning a Morningstar Analyst RatingTM. Prospects are sometimes dropped from the list if there are negative fundamental changes, such as investment team turnover or a material change to the investment process, or if investor interest isn’t strong enough to maintain coverage. Strategies don’t have to remain on the Morningstar Prospects list for a set period of time, but the majority tend to reside there for one to two years.

How the Morningstar Prospects list has performed

We track the performance of strategies while they are on the Morningstar Prospects list and discuss their performance regularly with readers.

To measure Prospects’ performance, we equal-weight each fund (oldest-share class only) on the list, reconstituting the portfolio periodically to reflect changes. We add funds in the quarter they first appear on the list and drop them—either because they’ve graduated to coverage or otherwise been removed—in the publication we announce their removal. Then we compare this portfolio to a blended Morningstar Category average that mirrors the category classifications of the funds in Prospects, as well as a blended index that mirrors the indexes assigned to the funds.

The list was launched in September 2014, so its track record is short. Through June 2018, the Prospects list has matched the weighted category average and trailed the blended benchmark. However, it is important to remember that all investing involves risk and past performance is not a guarantee of future results.

What new investment strategies made the Morningstar Prospects list

The Prospects list saw significant changes in the first half of 2018. Five new investment strategies were added, four others graduated to full coverage, and four were dropped from the list.

Read more details about the graduates and see strategy overviews for each addition by downloading the latest Prospects list. In the meantime, here’s an overview of one of the new investment strategies to the Prospects list, Artisan Global Discovery (APFDX):

Artisan Global Discovery is just 11 months old, but it comes with a substantial pedigree. Its four portfolio managers and the team behind them have steered Artisan Mid Cap (ARTMX), Artisan Global Opportunities (ARTRX), and Artisan Small Cap (ARTSX) since 1997, 2008, and 2009, respectively, and all three funds have earned a Morningstar Analyst Rating of Silver. 

The team’s history of investing substantially in non-U.S. markets is a bit shorter—world large-stock fund Global Opportunities moved from the large-growth Morningstar Category (which focuses heavily on U.S. stocks) in 2012. But the team was careful to add knowledge and experience in non-U.S. firms before gradually ramping up that fund’s stake in such stocks over a period of several years.

Most of this fund’s holdings are also owned by one or more of the team’s other charges. We believe that’s comforting, as it suggests the fund isn’t straying too far into territory the team hasn’t explored before. But capacity bears watching, as Artisan Mid Cap and Artisan Small Cap are closed to new investors and Artisan Global Opportunities is nearing the team’s capacity estimate. Mid Cap is seeing substantial outflows, however, and the team doesn’t intend to reopen it soon as it creates capacity for this fund. Finally, this fund’s fees are currently high, but we believe they should decline significantly if the fund grows.

The full list and publication are available in Morningstar DirectSM , our investment analysis platform for financial professionals. If you’re a user, you have access. If not, try it for free today.

Please see below for important disclosure.

Get the full list of under-the-radar funds and promising investment strategies featured in Morningstar Prospects.

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The Morningstar Analyst Rating™ is not a credit or risk rating. It is a subjective evaluation performed by Morningstar’s manager research group, which consists of various Morningstar, Inc. subsidiaries (“Manager Research Group”). In the United States, that subsidiary is Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Commission.  The Manager Research Group evaluates funds based on five key pillars, which are process, performance, people, parent, and price. The Manager Research Group uses this five pillar evaluation to determine how they believe funds are likely to perform relative to a benchmark, or in the case of exchange-traded funds and index mutual funds, a relevant peer group, over the long term on a risk-adjusted basis. They consider quantitative and qualitative factors in their research, and the weight of each pillar may vary. The Analyst Rating scale is Gold, Silver, Bronze, Neutral, and Negative. A Morningstar Analyst Rating of Gold, Silver, or Bronze reflects the Manager Research Group’s conviction in a fund’s prospects for outperformance. Analyst Ratings ultimately reflect the Manager Research Group’s overall assessment, are overseen by an Analyst Rating Committee, and are continuously monitored and reevaluated at least every 14 months. For more detailed information about Morningstar’s Analyst Rating, including its methodology, please go to global.morningstar.com/managerdisclosures/.  The Morningstar Analyst Rating (i) should not be used as the sole basis in evaluating a fund, (ii) involves unknown risks and uncertainties which may cause the Manager Research Group’s expectations not to occur or to differ significantly from what they expected, and (iii) should not be considered an offer or solicitation to buy or sell the fund.

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