Undiscovered Managers Behavioral Val R5 UBVVX

The portfolio maintains a sizable cost advantage over competitors, priced within the second-cheapest 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. 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 57% also strengthens the process. 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. 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's portfolio also has had exposure to more stocks with high dividend or buyback yields over peers in these years. High-yield stocks tend to be associated with more mature, profitable businesses that can grow as well as provide a stream of income. Such stocks could suffer, however, if setbacks force them to cut their dividends. Compared with category peers, the strategy also had more exposure to the Yield factor in the most recent month. Additionally, this strategy has demonstrated 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 14.7 and 3.4 percentage points, respectively. The sectors with low exposure compared to category peers are technology and industrials, underweight the average by 7.0 and 3.6 percentage points of assets, respectively. The strategy owns 96 securities and is relatively concentrated. Specifically, 30.7% of the fund’s assets are housed within the top 10 holdings, compared with the category’s 28.1% average. And finally, in terms of portfolio turnover, looking at year-over-year movements, 39% of the fund's holdings have turned over, whether through increasing, decreasing, or changing a position.

The main contributor to the rating is its parent firm's five-year success ratio of 57%. 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 is also improved because at least one manager has invested more than$ 1 million in the strategy, which aligns their interests with fundholders. The portfolio managers' outperformance at the funds they run, as measured by their combined three-year manager excess returns, supports the rating further.

David M. Potter, the longest-tenured manager on the strategy, boasts 19 years of listed portfolio management experience. The average Morningstar Rating of the strategies they manage is 3.8 stars, demonstrating above-average risk-adjusted performance compared to category peers. David M. Potter has an experienced listed co-manager. Together, they average 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.

The strategy has had volatile swings in returns, evidenced by a higher standard deviation, 27.0%, than the benchmark, 24.9%, over the five-year period. This added volatility contributed to mixed risk-adjusted performance, depending on the metric used. The share class led the index with a higher Sharpe ratio, a measure of risk-adjusted return, over the trailing five-year period. However, the share class proved itself ineffective as it was unable to generate alpha, over the same period, against the category group index: a benchmark that encapsulates the performance of the broader asset class.

Fortunately, when looking at the fund's absolute returns, it came out ahead. Over the past three-year period, it beat the category index, the Russell 2000 Value Index, by 7.2 percentage points, and outperformed its average peer by 3.5 percentage points. More importantly, when looking across a longer horizon, the strategy came out ahead. On a five-year basis, it led the index by an annualized 3.9 percentage points.

This share class is in the second-cheapest quintile of its Morningstar Category. Its low fee, taken together 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, explaining its Morningstar Medalist Rating of Gold.