Twice a year, Morningstar's manager research analysts publish Morningstar Prospects, a list of up-and-coming or under-the-radar investment strategies that are not currently covered by the research group but might merit future coverage. The list features promising funds that you might want to put on your watchlist.
The recently published December 2019 issue, available to Morningstar Direct and Office users here and covered further here, included 47 investment strategies across asset classes, categories, and investment vehicles. In the issue, Morningstar Prospects added 11 strategies, including several with environmental, social, and governance approaches, graduated eight to full coverage, and dropped one. While not all funds in the publication ultimately earn Morningstar Medalist ratings, the list has sourced many of our research team's high-conviction picks. For example, Pimco Short Asset Investment PAIDX graduated from the list in 2019's second half with a Morningstar Analyst Rating of Gold. Below, we highlight four recent additions to Morningstar Prospects.
Alger Mid Cap Focus AFOZX launched only in June 2019, but manager Amy Zhang is a known quantity. Zhang honed her investing skills in more than a dozen years of comanaging Gold-rated Brown Capital Management Small Company BCSIX before joining Alger in 2015 to take up Alger Small Cap Focus AGOZX. She's had an impressive run since then, contributing to that fund's Silver rating. This fund's strategy is a natural extension of her small-cap work. Zhang targets companies with operating revenues of at least $500 million and visionary management teams. She builds a high-conviction portfolio of about 50 stocks or less, and she's willing to pay up for long-term growth prospects. Yet the fund isn't without drawbacks. About half its assets are in names shared with the now-closed Alger Small Cap Focus, calling the mid-cap strategy's capacity into question. There's also key-person risk in Zhang. Even so, Zhang's stellar record with similar strategies and her investing acumen make this a promising new offering, and the young fund's above-average fees could get cheaper as its assets grow.
Brown Advisory Sustainable Growth BAFWX offers an effective take on sustainable investing. Comanagers Karina Funk and David Powell have managed this strategy since June 2012. The two seek efficient businesses with strong customer loyalty and revenue growth, operating in industries with high barriers to entry. The duo's patient approach has resulted in low turnover and superior returns relative to its large-growth peers over the managers' seven-year tenure.
Funk and Powell have deep industry experience and complementary backgrounds despite working in separate locations. The Boston-based Funk’s expertise is in technology, while Powell--who sits in Brown Advisory’s Baltimore offices--has a long history with industrial stocks. Historically, both sectors have played big roles in the portfolio. The pair works closely with the firm’s central analyst team, particularly its three sustainability analysts, who collaborate with Brown Advisory’s fundamental analysts to uncover companies’ sustainability drivers and ESG risks, such as regulatory concerns and reputational threats. Funk and Powell do not consider sustainability separate from company fundamentals or use exclusionary screens--in their view, ESG considerations are a necessary component of their fundamental research.
Chiron Capital Allocation's CCAPX lead portfolio manager and CIO Ryan Caldwell co-founded Chiron Investment Management in 2015 after departing Waddell & Reed in 2014. At Waddell & Reed, he comanaged the firm's flagship fund Ivy Asset Strategy WASCX from early 2007 through mid-2014. The fund earned strong returns under his purview but ran into performance woes shortly after he departed. Caldwell says this fund's approach closely mimics what he implemented at Ivy Asset Strategy, though this fund doesn't use private placements, which exacerbated Ivy Asset Strategy's problems.
The strategy is well-researched, but it is also highly complex and has a short track record in its current form. Primarily quant-driven, the strategy seeks to capitalize on macroeconomic trends and undervalued securities in worldwide markets. Signals such as investor sentiment and management behavior inform the top-down positioning. A fundamental research team then selects approximately 100 holdings. The portfolio has wide guardrails; for instance, equities can shift from 25% to 80% of assets, and bonds can take between 10% and 50% of assets. Management has made use of that flexibility, as evidenced by consistently high turnover, which clocked in at 145% during 2018.
Caldwell splits the investment team into two separate groups: a quant team, headed by Brian Cho, and a fundamentals team, captained by former Buffalo Funds stock-picker Grant Sarris. The fund's fourth comanager, Scott Sullivan, joined the management roster in early 2019 and previously worked with Caldwell at Waddell & Reed.
TIAA-CREF Green Bond TGRNX, launched in November 2018, is one of the more interesting fixed-income ESG offerings available to investors. Rather than simply screening on ESG criteria or considering those factors during the usual investment process, this fund focuses on investments that have a direct ESG impact, such as funding renewable energy, the redevelopment of contaminated sites, or sustainable building projects. These investments may carry the official "green bond" label, or they may be considered equivalent based on the firm's own assessment. This investment approach is also used with a portion of the assets in Bronze-rated TIAA-CREF Social Choice Bond TSBRX. Stephen Liberatore manages both funds; he is Nuveen's lead portfolio manager for fixed-income ESG investing and is supported by one of the most robust ESG teams in the industry, along with the firm's large and experienced fixed-income team. The sole focus on green bonds and other impact investments may result in a narrower opportunity set and possibly divergent returns, but the management team's success running TIAA-CREF Social Choice Bond suggests that ESG investors should keep an eye on this fund.