How Morningstar Analysts Find Funds to Watch

Over 680 new ETFs and open-end funds launched in the United States last year, Morningstar data shows. With a growing menu of options, it’s easy to overlook up-and-coming or under-the-radar strategies.

Our manager research team combs through model portfolios, mutual funds, and ETFs to identify investments for potential full coverage. The Prospects list recently added 11 new strategies, including four from Capital Group.

Here’s how you can recreate our team’s work to find lesser-known or newer investment strategies. For our full list of 33 funds to watch, download the Morningstar Prospects list.

Stay on top of up-and-coming mutual funds with Securities and Exchange Commission filings. Registration statements and prospectuses can help investors find new funds that launched in the past year. Regulatory filings can also help investors find funds with strategy changes.

Our analysts review the forms for promising information about the portfolio managers, and their objectives and strategies.

Investors often screen for more tenured managers to find stable, experienced investment teams. However, this approach can overlook firms with category expertise and portfolio managers with impressive track records on other investment vehicles.

Search for fund managers with established records at other open-end mutual funds or separate accounts. Do they have many years of industry experience, even though they’re new to a fund? What other investments do they manage, and how have those performed?

Tenure-weighted averages reveal career-long patterns and relative performance compared to peers in the same category. Review data points like excess average return, Sharpe ratio, alpha, and beta compared to the category benchmark.

A quick example.

Launched in February 2023, the Capital Group Active-Passive Growth Models series generally mirrors the American Funds Growth series.

An experienced, well-resourced asset-allocation team oversees the series. The firm’s portfolio solutions committee began bolstering resources and focusing its efforts on fund-of-funds strategies in 2020.

Multi-asset manager Samir Mathur leads the committee with six other experienced managers, each with at least 28 years in the industry. The growing capital solutions group provides research and monitoring support.

Small funds with distinctive processes might fall through the cracks of screens based on size.

Funds with over $500 million in assets are less likely to close or merge with another fund. But smaller funds can come with their own advantages.

Small funds can be nimbler, investing higher percentages in individual securities or small-cap companies without affecting stock prices. Portfolio managers can take a stock-picking approach that wouldn’t scale across more assets under management. Because of their short track records, funds younger than three years require extra scrutiny.

Here's an example.

PGIM Target Date Series has $10.92 million in total net assets. The strategy was modified in December 2023, offering open architecture and a lower price tag for retirement savers.

This target-date series starts with an equity allocation of 97% and tapers down, hitting 45% at retirement. It continues to reduce its equity allocation until 10 years after retirement when it allocates 35% to equities.

The underlying funds include a blend of passive equity funds and active bond managers. Since its 2014 inception, the series includes an allocation to commodities and direct real estate, which average 5% and 5.5%, respectively, across the glide path.

Past performance data can conceal information about a fund’s long-term potential. Changes to an investment team or strategy can transform a previously unappealing fund into an opportunity worth considering. These funds might fall through the cracks of initial screeners because of their long-term 3-year and 5-year returns.

For example, the formerly underperforming Baird Equity Opportunity Fund has fresh prospects after a December 2021 manager change. Joe Milano is a well-known entity who's had success elsewhere. Milano ran T. Rowe Price New America Growth (now called All-Cap Opportunities) from 2002 to 2013 before starting Greenhouse Funds, which serves as a subadvisor here.

After a change, investors should continue to monitor a fund to ensure it meets the style profile they’re seeking.

Sometimes, opportunities among existing funds haven’t yet attracted assets or attention. Screening by performance metrics or expense ratios can surface fund managers that flew beneath your radar.

Let’s look at an example.

Sean Thorpe and Geoffrey Stewart have successfully led Aristotle International Equity since the fund's March 2014 inception. They have run the same strategy via a separate account since January 2008. Across its fund lineup, the firm looks for companies with maintainable competitive advantages, attractive valuations, and paths for improvement.

As the number of funds grows, the screens above can help investors tune out the noise and discover new opportunities. After the initial search, investors should dig into their next phase of due diligence. Nontraditional strategies may come with significant risks and may not be appropriate for many investors.

Cut through the noise of investment data with the help of Morningstar research. Our independent data, analysis, and ratings grow your capabilities, not your headcount.

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Adapted from a 2022 article by Nicholas Goralka.