In the first half of 2020, the Morningstar Prospects list gained three new equity strategies that investors may want to put on their watchlist.
Maintained by Morningstar Manager Research analysts, Morningstar Prospects is a list of up-and-coming or under-the-radar fund managers and strategies that the team believes may have enduring advantages and long-term appeal.
Analysts consider a variety of quantitative and qualitative factors when proposing candidates for the Prospects list, including management experience, the uniqueness and durability of the strategy, performance, and fees. A committee of senior analysts and team leaders with extensive experience assessing equity, fixed-income, and alternative strategies then makes the final decision on a strategy’s inclusion. Prospects typically have not been subject to full qualitative analyst coverage in the past but may merit such coverage in the future.
Below, explore the three new equity funds that the team added to the July 2020 list, each with a markedly different approach to investing.
Jensen Quality Value JNVYX Jensen Quality Value has a solid pedigree. It shares the same team and key features of the process behind Jensen Quality Growth JENSX, a large-growth strategy that has a Morningstar Analyst Rating of Silver. This strategy, however, pays more attention to valuation and mid- and small-cap stocks. Portland, Oregon-based Jensen Investment Management launched it in 2010 as a more systematic, quasi-quantitative strategy that combed the firm's universe of stocks that have posted a 15% return on equity for 10 consecutive years for those with low relative valuations and smaller market caps. The firm revamped the process after 2016, when it reduced holdings to 30-50 stocks from 60-80 stocks. Jensen also hired two analysts in 2017 to find more small- and mid-cap stocks trading at steep discounts to intrinsic value than the team might accept at Jensen Quality Growth.
The fund managers are experienced, albeit with the firm’s large-cap quality-growth strategy, averaging more than two decades in the industry and more than a decade at the firm. The process hinges on the managers’ expertise on finding profitable stocks with competitive advantages, as well as a three-stage dividend discount model to gauge valuations. Given the firm's growth-stock ethos and the managers' valuation-consciousness, the portfolio ends up looking more like a growth/value blend rather than value. Its holdings exhibit qualities that tend to help stocks hold up in turmoil, such as economic moats, strong balance sheets and solid profitability. It could lag, however, when deeper value stocks lead.
WCM Focused Emerging Markets WCMEX WCM Focused Emerging Markets is trying to follow the path of its older sibling, Bronze-rated WCM Focused International Growth WCMIX, which graduated from Morningstar Prospects in December 2019. Both equity funds leverage the same research team, and the firm's nuanced moat-trajectory framework grounds each strategy. Here, fund managers Greg Ise and Mike Tian target emerging-markets firms with strong corporate cultures that drive widening moats. Most of the strategy's growing 14-person team serve as generalists, which allows them to apply different themes and successful investment theses across sectors.
A key difference between the two strategies bears watching. Ise and Tian, who took up this fund in 2018, are less experienced as fund managers than their counterparts on WCM Focused International Growth. That said, the firm's investment-committee structure lets Ise and Tian tap their colleagues' expertise. This gives them a good chance to succeed over the long run.
William Blair Large Cap Growth LCGFX William Blair Large Cap Growth's understated process drives its appealing record. Fund managers Jim Golan and David Ricci ply a measured approach to growth investing. They narrow the investment universe by identifying growing industries for further analysis. From there, the managers and 10 supporting analysts seek to uncover firms with structural advantages, such as adept management or persistent excess returns on investment, that can help them capture market share. But this isn't a growth-at-any-cost strategy. Golan and Ricci layer in valuation and split the concentrated, 35- to 40-name portfolio between consistent growers and firms facing near-term headwinds but promising long-term opportunities.
Ricci has refined the approach since joining the strategy in December 2011. He has pushed his analysts to take longer-term views, and he has tightened the portfolio's sector weightings relative to the Russell 1000 Growth Index. The adjustments appear to be working: Since Ricci joined, the equity fund has outpaced the Russell 1000 Growth Index and 90% of its large-growth Morningstar Category peers. The $1.3 billion strategy is a relatively small but attractive option in a highly competitive market segment.