4 New Funds on Our Radar
Our analysts added these promising funds to the Morningstar Prospects list.
Morningstar’s latest Prospects list of overlooked or emerging fund managers and strategies includes the re-emergence of a stock-picker and some unique fixed-income approaches.
Here’s a look at four of the six strategies that our manager research team added to the January 2023 list.
Baird Equity Opportunity BSVSX
If manager Joe Milano’s name sounds familiar, that’s because he posted strong results at T. Rowe Price New America Growth (now called All-Cap Opportunities PRWAX) from 2002-13 before leaving to start Greenhouse Funds, which took over as this once-struggling fund’s subadvisor in December 2021. Greenhouse’s six-person team, including other T. Rowe expatriates, has run a long-short hedge fund since 2013 and broke out the long-only portion as its own strategy in 2019.
Milano, who started as a small/mid-cap analyst at T. Rowe Price, is a good fit for this strategy and no benchmark-hugger. At T. Rowe Price New America Growth, he did much of his own research in crafting a defensive-minded portfolio that included a lot of small- and mid-cap stocks. He uses a bottom-up approach to look for about 30 mispriced stocks with strong growth prospects for a concentrated portfolio with high active share against the Russell 2000 Index. Despite the concentration, his funds have typically held up in down markets without missing much upside. This fund followed that pattern in a rough 2022, losing less than its benchmark. Fees are high, but Milano promises to close the fund before it gets too big to manage effectively.
GMO Opportunistic Income GMOLX
Experience helps this strategy. Securitized-credit lead manager Joe Auth, GMO’s head of structured products and a firm partner, has 25 years of industry experience, including managing a similar long-short securitized-credit strategy at Harvard Management Company. A six-person team of structured product analysts supports him.
The strategy doesn’t take much interest-rate risk, but it does take credit risk. Still, the team has managed these risks well with a long-short approach using synthetic credit indexes such as CDX, an investment-grade and high-yield benchmark, and CMBX, a commercial real estate debt index, to offset these risks. If the team invests in riskier commercial mortgage-backed securities, for example, it can hedge the bet by shorting certain CMBX vintages. Typically, though, the fund favors less risky, senior tranches of securitized credit for their more attractive risk/return profiles.
Results have been enviable. From January 2017 through December 2022, the institutional shares’ 2.9% annualized gain beat the nontraditional bond Morningstar Category peer norm by 90 basis points and had one of the best Sharpe ratios (a measure of risk-adjusted return) in the category. The strategy also has often outperformed in both credit and rate stress periods, such as the sharp selloffs of 2020′s first quarter and all of 2022. Many strategies in the nontraditional bond category overpromise and underdeliver, but this strategy has thus far been a reliable diversifier.
Hartford Schroders Sustainable Core HSAEX
Hartford Schroders Sustainable Core Bond focuses on high-quality bonds in an effort to provide both long-term total returns and capital preservation while focusing on sustainability. It keeps at least 80% of assets in securities that meet the investment team’s sustainability criteria.
Schroders’ experienced and well-staffed U.S. multisector fixed-income team has subadvised this strategy since its January 2018 inception. Macro strategy specialist and industry veteran Lisa Hornby took over this team in late 2020 just before manager Andrew B.J. Chorlton exited to focus on his new role as the firm’s head of fixed income. Comanagers Neil Sutherland, Julio Bonilla, and Eric Lau bring decades of industry experience to the effort, including deep knowledge of corporate, high-yield, and municipal bonds. The managers lean on Schroders’ credit and quant investment staff as well as a dedicated sustainability research effort.
While the strategy’s relative value approach to fixed income is standard, its sustainability process is thoughtful. The managers integrate the research of the firm’s big sustainability team and proprietary tools, such as the SustainEx software engine, to determine the financial costs of potential investments’ social impact. The team builds high-conviction, opportunistic portfolios and tries to get an edge from sector rotation and industry and security selection.
The fund’s performance disappointed relative to the intermediate core bond category in a rough 2022, but longer-term results remain promising.
Schwab Municipal Bond ETF SCMB
The recently launched Schwab Municipal Bond ETF provides investors access to the municipal-bond market for a very low fee. The fund tracks the market-value-weighted ICE AMT-Free Core U.S. National Municipal Index. It targets investment-grade municipal bonds that are exempt from federal income tax and the Alternative Minimum Tax. The fund uses representative sampling and holds around 300 bonds compared with the index’s approximately 13,000. As assets increase, the fund should expand its holdings to mirror the index more closely, reducing tracking error.
The portfolio still resembles the characteristics of its benchmark index and is representative of the muni-national intermediate category. It takes on similar interest-rate risk to its average peer while keeping credit risk low by sticking to only investment-grade issues. The fund’s initial performance has been positive, and its target index’s longer-term results are strong. The index has beaten the category average since its 2010 introduction. The fund’s ultralow 0.03% fee presents a low hurdle to future success.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.