Undiscovered Managers Behavioral Val Fd earns an Above Average Process Pillar rating.
The predominant contributor to the rating is the fund's impressive long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category index, which suggests that the managers have shown skill in their allocation of risk. The parent firm's five-year risk-adjusted success ratio of 57% also bolsters the rating. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median Morningstar Risk-Adjusted Return for the period. Their commendable success ratio suggests that the firm does well for investors and that this fund may benefit from that. Lastly, the process is limited by being an actively managed strategy. Historical data, like Morningstar's Active/Passive Barometer, finds that actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons.
This strategy targets deeper value plays than its peers’ average in the Small Value Morningstar Category. But in terms of market capitalization, it is on par with peers. Analyzing additional factors, this strategy tilts consistently toward stocks with lower quality or the shares of companies with more financial leverage and lower profitability, compared with Morningstar Category peers over the past few years. Lacking this ballast, the fund's prospects will rest on its ability to surpass peers during economic booms. In the latest month, the strategy was also less exposed to the Quality factor compared with Morningstar Category peers. The managers have also tended to overweight yield during recent years, shown by the portfolio's high exposure to dividends or buybacks. Stocks with high yields can be more stable, mature companies, but at times extreme market pressure or fundamental deterioration may prompt them to cut their dividends, which tends to hurt stock performance. Compared with category peers, the strategy also had more exposure to the Yield factor in the most recent month. In addition, this strategy has had a bias away from momentum stocks during these years. Momentum tends to be a powerful force in asset markets, as stocks that have done well recently usually continue to do so in the short term. As top performers change, this can sometimes be hard to capture without higher trading costs. In recent months, the strategy also had less Momentum factor exposure than its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section.
The portfolio is overweight in financial services and utilities relative to the category average by 16.1 and 3.7 percentage points, respectively. The sectors with low exposure compared to category peers are technology and industrials, underweight the average by 6.8 and 4.2 percentage points of assets, respectively. The portfolio is composed of 99 holdings and is relatively concentrated. Specifically, 30.4% of the fund’s assets are housed within the top 10 holdings, as opposed to the typical peer's 25.7%. And in closing, in terms of portfolio turnover, this fund trades less regularly than the typical peer in its category, which may result in a lower cost to investors.