Undiscovered Managers Behavioral Val R6 UBVFX

The portfolio maintains a cost advantage over competitors, priced within the least expensive fee quintile among peers.

The strategy's managers invest alongside shareholders, which helps it earn a High People Pillar rating. The strategy's effective investment approach earns an Above Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a considerable underweight position in quality exposure and has a considerable overweight in yield exposure compared with category peers. Low quality exposure is attributed to stocks with higher financial leverage and lower profitability. And a high yield exposure is rooted in holding high dividend-paying or buyback stocks. The strategy's parent organization earns the firm an Above Average Parent Pillar rating, and this rating is inherited from vehicles belonging to the same branding entity and is indirectly assigned by an analyst.

Undiscovered Managers Behavioral Val Fd earns an Above Average Process Pillar rating.

The main contributor to the rating is the fund's strong 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 56% also influences the rating. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median Morningstar Risk-Adjusted Return for the period. Their relatively high 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, such as Morningstar's Active/Passive Barometer, finds that actively managed funds have generally underperformed their passive counterparts, especially over longer time horizons.

This strategy prefers more value-oriented stocks compared with the average fund in its peer group, the Small Value Morningstar Category. But in terms of size exposure, it is similar to the average. Analyzing additional factors, this strategy has consistently favored low-quality stocks compared with Morningstar Category peers over the past few years. Such positions do not tend to provide much ballast for a portfolio. In the latest month, the strategy was also less exposed to the Quality factor compared with Morningstar Category peers. This strategy has also displayed a tendency to hold more companies with high dividend or buyback yields than peers over recent years. Higher-yield stocks can provide dependable income, but also have their risks. Dividend payers may cut payouts, for instance, if their earnings fall. Compared with category peers, the strategy also had more exposure to the Yield factor in the most recent month. Additionally, the strategy has demonstrated a contrarian approach with relatively low exposure to momentum stocks during these years. Momentum investors tend to expect stocks that have done well recently to continue to do so in the short term. Momentum approaches can entail higher turnover and trading costs since the top stocks can often change. 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 13.9 and 3.6 percentage points, respectively. The sectors with low exposure compared to category peers are technology and industrials, underweight the average by 7.3 and 3.8 percentage points of assets, respectively. The portfolio has 99 holdings and invests 29.8% of assets in its top 10 holdings, similar to the category average. And finally, in terms of portfolio turnover, this portfolio turns over its holdings less quickly than peers, potentially leading to lower costs for investors and eliminating a drag on performance.

The main contributor to the rating is its parent firm's five-year success ratio of 56%. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median return for the period. The rating also gains because at least one manager has invested more than$ 1 million in the strategy. The portfolio managers' outperformance at the funds they run, as measured by their combined three-year manager excess returns, supports the People rating as well.

The team is backed by David M. Potter, the longest-tenured manager on the strategy, who provides 19 years of listed portfolio management experience. The average Morningstar Rating of the strategies they currently manage is 3.8 stars, indicating that their risk-adjusted returns exceeded the category average. Despite having a small team, the two listed managers boast 13 years of listed portfolio management experience.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various global cohorts and diverse asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

This share class led its average peer by an annualized excess return of 2.9 percentage points over a 10-year period. And it was also ahead of the category index, the Russell 2000 Value Index, by 3.1 percentage points over the same period.

The risk-adjusted performance only continues to make a case for this fund. The share class outstripped the index with a higher Sharpe ratio, a measure of risk-adjusted return, over the trailing 10-year period. These strong risk-adjusted results have not come with a bumpier ride for investors. This strategy took on similar risk as the benchmark, as measured by standard deviation. However, the share class proved itself ineffective as it was unable to generate alpha, over the same 10-year period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

This share class is within the cheapest quintile of its Morningstar Category. Its attractive fee, considered jointly with the fund’s People, Process, and Parent Pillars, indicates that this share class has the ability to deliver positive alpha compared with its category benchmark, leading to its Morningstar Medalist Rating of Gold.