5 Former Prospects We Now Rate Highly

The latest graduates from the Morningstar Prospects List include highly rated strategies from Dimensional, BlackRock, and Vanguard.

In our latest report, we graduated eight strategies to full coverage because of either solid management or standout processes.

Here’s a look at five of them.

1. DFA US High Relative Profitability DUHP
2. FPA Flexible Fixed Income FPFIX
3. iShares LifePath Retirement ETF IRTR
4. Vanguard Emerging Markets Bond VEGBX
5. Victory RS Global RGGYX

Dimensional US High Relative Profitability

We initiated coverage on DFA US High Relative Profitability with Above Average People and Process ratings. It provides a cost-effective portfolio of the most profitable stocks in the US market and has historically outperformed the Russell 1000 Index.

Dimensional’s portfolio managers build this portfolio from a universe of US stocks that approximates the broad US market, with a couple of exclusions. They eliminate regulated utilities, owing to their limited upside, and REITs, which the firm provides through a separate fund. The managers further pare the universe down to large- and mid-cap stocks by ranking all stocks by their profitability and adding the top 35% (by market cap) to the portfolio. On average, the portfolio has a higher price/book ratio than the market, but it still lands in the large-blend Morningstar Category.

This approach pays some attention to valuation, though, because it avoids growth traps, or names with steep price tags unsupported by fundamentals. Less profitable large-cap stocks such as Amazon.com AMZN and Alphabet GOOGL don’t make the cut. The managers initially weight all stocks by market cap, then tilt weightings toward smaller, cheaper, and more profitable shares. That reduces the weights of the market’s largest and most expensive stocks, but the effect is small.

The strategy has produced a compelling record since the team took over in March 2019.

FPA Flexible Fixed Income

FPA Flexible Fixed Income graduated with Above Average People and High Process ratings. The strategy falls in the nontraditional bond Morningstar Category because it has limited constraints and no set benchmark. It seeks to produce positive returns over three-year periods and beat inflation by 200 basis points over five-year periods.

First Pacific Advisors has managed this fund’s sibling, FPA New Income, with great long-term success. This strategy has more flexibility but shares much of the same style and process. It holds an eclectic mix of bonds that may look risky on the surface but have underlying safeguards or collateral features that make them safer than they appear.

The strategy benefits from a decent team. Manager Abhijeet Patwardhan has been on the fund since its 2018 inception and took over as sole manager when Tom Atteberry retired in 2022. The broader team includes five analysts, with most having at least five years of firm experience.

iShares LifePath Retirement ETF

IShares LifePath Target Date ETF graduated with High People and Above Average Process ratings. The series is the only target-date strategy offered as an exchange-traded fund (which keeps it out of workplace retirement plans). It’s a strong option for individual retirement accounts or supplementing retirement savings in taxable accounts and makes target-date investing more accessible and affordable with its low price tag, no minimum investment, and fees that range from 0.08% to 0.12%.

The recently launched series shares many of the hallmarks of a first-class target-date option, including a differentiated glide path that starts with an above average 99% starting equity allocation that decreases to a below average 40% at retirement. That’s a steeper glide path than most, yet it largely resembles the firm’s flagship BlackRock LifePath Index series.

BlackRock’s target-date team, which manages all the firm’s target-date offerings, remains best in class. The thoughtful research of lead manager Chris Chung and his team drives its investment decisions.

Vanguard Emerging Markets Bond

Vanguard Emerging Markets Bond also graduated to full coverage in December with Above Average People and Process ratings. Managers Dan Shaykevich and Mauro Favini are proven and capable. They draw on a decent-size team of seven dedicated analysts and two traders, as well as Vanguard’s shared personnel of corporate sector specialists and additional traders.

The team’s relative-value-driven approach considers each security’s risks and correlations before investing. The managers invest primarily in hard-currency sovereign debt, which typically represents 60%-70% of assets. The rest is in local-currency, corporate, quasi-sovereign debt, and US Treasuries. The strategy typically outperforms most emerging-markets bond Morningstar Category peers during times of stress.

Victory RS Global

Victory RS Global graduated with Above Average People and Process ratings. It has several appealing traits that make it a solid global core equity offering.

For starters, the strategy benefits from strong leadership. Lead manager U-Wen Kok has headed the RS Global team since 2013, the same year she joined RS Investments. At that time, she brought over the blended approach that she had honed throughout her career, which now spans 35 years.

The bedrock of the approach is a quantitative model, focusing on quality, valuation, and sentiment factors. It is designed to identify firms creating shareholder value (the quality factors) that aren’t trading at a premium (the valuation factors) but also aren’t value traps (the sentiment factors). The team also incorporates a fundamental research framework, recognizing that even strong models have limitations. To that end, the managers qualitatively review model recommendations, analyze company-specific issues, and assess macro trends. Sound risk management permeates the entire process from start to finish.