A common equity investing adage is to buy a business that anyone could lead—the simpler the business, the more attractive it is.
The same could apply to equity strategies. If a strategy’s investment process is well defined, repeatable, and straightforward, it doesn’t require management team heroics. In fact, the process may be strong enough to overcome team weaknesses, if there are any.
To test the latter example, one can look for Morningstar Medalists that earn Above Average Process ratings but Average People ratings. These situations aren’t common, so they shed light on how Morningstar manager research analysts evaluate equity strategies.
Here are a few examples.
VY Invesco Oppenheimer Global IGMIX
This strategy’s patient focus on successful companies with strong fundamentals supports its Above Average Process rating. Manager John Delano and his team look for companies with enduring competitive advantages and effective management in growing industries that they can hold for years. That tilts the portfolio toward dominant and profitable firms and results in lower turnover than its global large-growth Morningstar Category peers.
Delano is still relatively new, though. He joined this strategy as a manager in 2017 and assumed lead responsibilities in 2019 following the retirement of longtime skipper Rajeev Bhaman. Before becoming a manager here, Delano was an analyst on this strategy for six years, but he still has more to prove, warranting an Average People rating.
AB Small Cap Growth QUASX
This strategy’s consistent approach earns an Above Average Process rating. The portfolio managers assess company fundamentals to find stocks that can beat Wall Street earnings expectations and leverage quantitative signals like price momentum to inform buys and sells. This process creates a growth-leaning portfolio that has succeeded in a variety of market environments. Portfolio construction is also conservative. The strategy caps positions at 2.5%, keeps active bets within 1 percentage point of the index, and has 15%-20% in the top 10 of its 100-125 stocks.
However, the strategy’s longtime lead manager, Bruce Aronow, will retire at the end of 2023, shrinking an already small five-person team to four. The remaining managers will also change their coverage responsibilities since AB doesn’t plan to replace Aronow, who covered consumer stocks, including some of the strategy’s top performance contributors over the years. His retirement will test the remaining team members, warranting an Average People rating.
Hartford Schroders International Multi-Cap Value SIDNX
This Above Average approach uses quant screens to rank non-U.S. companies by quality and value factors relative to their industries. Schroders’ quantitative equity products management team also considers profitability, business stability, and management effectiveness, among other traits. The resulting portfolio holds hundreds of mostly large-cap stocks, but it also includes some mid- and small caps. This approach has a successful record: Its 2.5% annualized gain in the 15 years through August 2022 beat the MSCI ACWI ex USA Value’s 0.7%.
That said, lead manager Justin Abercrombie retired in April 2022, leaving comanagers Lukas Kamblevicius and Stephen Langford in charge. Both have ample experience: Kamblevicius joined Schroders’ QEP group in 2017 and oversees its core and quality strategies, and Langford came aboard in 2003 and leads the group’s value offerings. The QEP team behind this strategy is decently sized, but since 2020, 12 analysts have departed, and five portfolio managers have left since 2019. Schroders replaced many of those people resources and plans to hire more, but turnover remains enough of a concern to warrant an Average People rating.
Janus Henderson Contrarian JACNX
The bold approach of portfolio manager Nick Schommer earns an Above Average Process rating. He splits the portfolio between companies with strong but misunderstood business models and those with undervalued assets. This creates a portfolio with a wide range of stock valuations, which can help the strategy in a variety of markets. Schommer doesn’t pay much attention to an index, but he manages the risks of his high-conviction approach well. He caps individual positions at 8% and tries to own firms with strong competitive advantages.
Schommer, who has led this strategy since 2017, works solo here but taps Janus’ 35-member analyst team. Despite its decent size, that team has seen a lot of turnover—18 departures in the last five years—and focuses on growth stocks, a more limited universe than this eclectic strategy’s. Schommer works with the firm’s fixed-income team, particularly its high-yield group, to find value stocks, but these concerns about this supporting staff hold the strategy’s People rating at Average.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.