6 min read
How Morningstar Analysts Find Funds to Watch—And What They Are
Borrow tips from our manager research team to assess up-and-coming investment strategies.
Over 680 new exchange-traded and open-end funds launched in the United States last year, Morningstar data shows.
Our manager research team combs through model portfolios, mutual funds, and ETFs to identify investments for potential full coverage. The Morningstar Prospects list unveils promising, under-the-radar investment strategies that are carefully watched for potential coverage.
Adding 16 new strategies and eliminating 3 in July 2024, the list now comprises 44 strategies that show potential for long-term success. The selection process emphasizes factors such as management experience, unique strategies, performance, and fees.
New Additions and Drops From the Prospects List
The list’s newest members include the Alpha Architect 1-3 Month Box ETF, or BOXX, which uses a unique options strategy to deliver Treasury yields with favorable tax treatment.
American Century High Income’s AHIIX focuses on financially robust debts, while American Funds Multi-Sector Income’s RMDUX employs a nuanced approach in the multisector bond category. A range of strategies focusing on dividends and foreign markets also made the list, promising innovative approaches to diversified portfolios.
Despite their potential, some strategies failed to gain a foothold on the list. These include:
- Invesco Russell 1000 Dynamic Multifactor ETF’s OMFL, whose competitive advantage remained ambiguous.
- IShares Fallen Angels USD Bond ETF FALN struggled to differentiate itself.
- Morgan Stanley Developing Opportunity MDOEX also exited the list, primarily due to its high volatility and inability to stand out.
Where We Look for Under-the-Radar Strategies
With a growing menu of options, it’s easy to overlook up-and-coming or under-the-radar strategies. Here’s how you can recreate our team’s work to find lesser-known or newer investment strategies. For our full list of 44 funds to watch, download the Morningstar Prospects list.
Monitor regulatory filings
Keep an eye on Securities and Exchange Commission filings. Registration statements and prospectuses can help investors find new funds that have 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.
Look for launches from experienced managers
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?
Research small funds with unique strategies
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.
Seek out funds with updated management teams
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.
After a change, investors should continue to monitor a fund to ensure it meets the style profile they’re seeking.
Filter for small funds with long track records
When compiling the final list, importance is given to funds with smaller asset bases, long track records, and youthful funds under three years are given a closer look.
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.
Build on Analyst Research You Trust
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.
From data feeds and research to platforms and advanced analytics, Morningstar Data+Analytics empowers professional investors so they can create great products, deliver great service, and provide great advice.
Adapted from a 2022 article by Nicholas Goralka.
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