4 New Funds on Our Radar

Morningstar Manager Research’s latest list of overlooked or emerging fund managers and strategies includes strategies from three industry stalwarts.

Here’s a look at four of the six strategies the team added to the July 2023 list.

American Funds Emerging Markets Bond EBNGX

American Funds Emerging Markets Bond EBNGX blends hard- and local-currency emerging-markets debt, which sets it apart from most hard-currency-focused peers in the emerging-markets bond Morningstar Category. Capital Group veteran Robert Neithart leads this strategy, though he is set to retire at the end of 2023. Kirstie Spence, comanager since April 2016, is an able successor. She has been at the firm for 27 years and is principal investment officer of the Capital Group Emerging Markets Local Currency Debt UCITS fund, which earns a Morningstar Medalist Rating of Silver. Fellow firm veteran Luis Freitas de Oliveira joined Neithart and Spence in March 2019. A deep emerging-markets team that includes seven sovereign analysts, four corporate analysts, one currency strategist, and six traders backs the trio.

The strategy’s portfolio is distinctive. Its home base is 50% of assets in U.S. dollar-denominated debt and 50% in local-currency-denominated issues, but it can move 15 percentage points one way or the other depending on a combination of top-down and bottom-up research. The fund’s typical category rival holds only about 15% in local-currency bonds. While the fund primarily features emerging-markets sovereign debt, the team will also take smaller stakes in emerging-markets corporate and inflation-linked bonds.

While the strategy courts foreign-currency risk, performance has been strong so far. It has outpaced the category norm in all but one of the six full calendar years since its inception. The strategy’s F3 shares’ 2.9% annualized gain from its first full month in May 2016 through June 2023 beat more than two thirds of distinct peers and was 174 basis points better than its blended benchmark (50% JPM EMBI Global Diversified Index and 50% JPM GBI-EM Global Diversified Index).

Dimensional U.S. High Profitability ETF DUHP

Dimensional U.S. High Profitability ETF DUHP leans into the most-profitable publicly traded companies listed on U.S. exchanges. Historically, a diverse portfolio of these names has tended to offer better long-term total return than the market with a minor reduction in risk.

The managers start with all large- and mid-cap stocks in the U.S. market and cut that broad universe down to the most profitable one third. They initially weight each stock by its market capitalization but then adjust those weights to emphasize names that are smaller, more profitable, and trade at lower valuations. Each stock’s market cap still influences its overall portfolio weight to keep turnover low.

The net result is a diverse portfolio of profitable large-cap stocks. Many of the companies in this portfolio generate solid earnings and count themselves among the largest companies listed on U.S. exchanges. Household names such as Apple AAPL, Microsoft MSFT, and PepsiCo PEP are among its largest positions.

Many of these profitable companies come with a trade-off: the market typically expects them to perform well in the future, so they trade at higher multiples on average than their less profitable peers. The strategy attempts to overcome these steeper multiples by placing more emphasis on cheaper names, but the effect is small. This portfolio has had a higher average price/book ratio than the Russell 1000, but it still lands in the large-blend category.

iShares Fallen Angels USD Bond ETF FALN

IShares Fallen Angels USD Bond ETF FALN captures a subsection of high-yield bonds that were previously rated investment-grade. These bonds tend to exhibit higher credit quality than the broad high-yield market but can also be quite volatile.

The fund tracks the Bloomberg US HY Fallen Angel 3% Capped Index, which sweeps in bonds from developed-markets issuers whose credit ratings have fallen from investment-grade status. The index also requires constituents to have an outstanding face value greater than $150 million and a maturity of at least one year. Issuer weight is also capped at 3%.

The net result is a portfolio of corporate bonds that courts less credit risk than the high-yield bond category average. Interest-rate risk is much higher, though. As of May 2023, its effective duration was 4.8 years, about 1.5 years longer than its typical category peer. This means the fund should perform well when interest rates decline and lag when rates rise quickly.

While its yield may not keep pace with some lower-quality peers, total and risk-adjusted returns have been favorable. The fund’s 5.3% annualized gain since its 2016 inception beat the category average by about 2 percentage points. And despite a standard deviation 37% higher than the typical peer, the fund looked better on a sturdy risk-adjusted basis, too.

Vanguard Emerging Markets Bond VEGBX

A promising team and a sensible process at an exceptional price make Vanguard Emerging Markets Bond VEGBX intriguing.

Over the past decade lead manager Dan Shaykevich has built a solid emerging-markets debt team from scratch. Vanguard hired Shaykevich from BlackRock in 2013 to establish the team, but it took time to build; this fund didn’t launch until March 2016. Shaykevich began his career structuring hedge-fund portfolios at BlackRock in 2001 before shifting to emerging-markets debt in 2004 and eventually to local- and hard-currency emerging-markets strategies. He now co-leads Vanguard’s emerging-markets squad with London-based lead strategist Nick Eisinger and comanages this strategy with Mauro Favini. Eisinger and Favini joined Vanguard in 2013 and 2017, respectively. A midsized but growing cast of two traders and six researchers support them.

Unlike some strategies that focus on either hard- or local-currency sovereign debt, this one invests in both as well as corporates. The team has sensible portfolio guardrails, though. The strategy is benchmarked against the U.S.-dollar-denominated sovereign-focused JPMorgan EMBI Global Diversified Index, but it typically runs sovereign underweightings of 10%-20% in favor of quasi-sovereigns and corporates as well as local-currency-denominated debt. The team limits its local-currency sleeve to 10% of assets, duration to within 1 year of the benchmark, and individual positions small. Security selection has driven outperformance so far, but the fund also uses credit default and interest-rate swaps as well as currency forwards to manage risk and gain targeted exposure.

The 5.6% annualized gain of the strategy’s admiral share class from its first full month in April 2016 through June 2023 trounced its typical emerging-markets bond category peer and its benchmark by more than 350 basis points annualized, with the best information ratio (risk-adjusted return relative to the category benchmark) in the category.