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Morningstar Prospects: How We Curate Our List of Promising Investment Strategies

Morningstar's December 2018 report on the latest hidden gems

For insights on the most recent Morningstar Prospects list, visit this blog post.

Twice a year, we publish a list of several dozen up-and-coming or under-the-radar investment strategies that are not currently covered by Morningstar Research Services’ manager research group but might be in the future. Consider this report a list of what we believe to be hidden gems and promising strategies.

Here are some details about the Morningstar Prospects list and how it comes together:

How the Morningstar Prospects list is created

The manager research team conducts significant due diligence to uncover new strategies for the list. The team screens the investment universe and speaks to portfolio managers and other industry contacts to glean ideas. The team then vets each candidate before it can be added to the Morningstar Prospects list.

These investment strategies typically are run by under-the-radar managers or are new funds run by experienced managers. They may also entail unique investment processes.

What makes the Morningstar Prospects list wide-ranging

While most are actively managed traditional mutual funds, many of these strategies are also available as separate accounts and/or collective investment trusts. The list also features passive strategies in both traditional and exchange-traded form. And several approaches that carry a focus on environmental, social, and governance factors currently make the cut.

While the team generally chooses investment strategies it expects to outperform over the long term, some can be noteworthy for reasons other than conviction in future performance. For instance, the funds may pursue an interesting strategy or have gathered a large sum of assets in a short period.

Why some investment strategies roll off the list

Strategies can graduate to full coverage when the team is comfortable assigning a Morningstar Analyst Rating™. Prospects are sometimes dropped from the list if there are negative fundamental changes, such as investment team turnover, a material change to the investment process, or if investor interest isn’t strong enough to maintain coverage. Strategies don’t have to remain on the Morningstar Prospects list for a set period, but historically, the majority tend to reside there for one to two years.

Since the publication’s 2014 start through December 2018, 70 strategies graduated from the list, and 30 were dropped. Of the graduated strategies, 14 held Analyst Ratings of Silver, 37 were Bronze, 11 were Neutral, and two were Negative as of December 2018. Six graduates were dropped from coverage.

How the Morningstar Prospects list has performed

We track the performance of strategies while they are on the Morningstar Prospects list and discuss their performance regularly with readers.

To measure Prospects’ performance, we equal-weight each fund (oldest-share class only) on the list, reconstituting the portfolio periodically to reflect changes. We add funds in the quarter they first appear on the list and drop them—either because they’ve graduated to coverage or were otherwise removed—in the publication we announce their removal. Then we compare this portfolio to a blended Morningstar Category average that mirrors the category classifications of the funds in Prospects, as well as a blended index that mirrors the indexes assigned to the funds.

The list was launched in September 2014, so its track record is short. Through December 2018, the Prospects list edged the weighted category average but trailed the blended benchmark. However, it’s important to remember that all investing involves risk, and past performance is not a guarantee of future results.

What new investment strategies made the Morningstar Prospects list

The Morningstar Prospects list saw significant changes in the second half of 2018. Eleven new investment strategies were added, one graduated to full coverage, and four were dropped.

Read more details about the graduates and see strategy overviews for each addition by downloading the latest Prospects list. Here’s an overview of one of the list’s the new investment strategies, Baron Discovery ( BDFFX):

Led by an up-and-coming management duo, Baron Discovery is off to a strong start. Comanagers Laird Bieger and Randy Gwirtzman have led the fund since its late-2013 launch but are no strangers to small caps. They joined Baron Capital in the early 2000s as analysts, supporting Silver-rated Baron Small Cap BSFIX manager Cliff Greenberg. While Greenberg has been a resource and mentor, Bieger and Gwirtzman have given their small-cap fund a distinct profile. Baron Small Cap skews higher on the market-cap spectrum, whereas this fund offers pure small-cap exposure, with an average market cap in line with the Russell 2000 Growth Index. Additionally, this fund is more willing than its cousin to invest in earlier-stage and riskier fare, such as biotech and pharmaceutical companies, so long as they meet Bieger and Gwirtzman’s quality criteria.

Thus far, the fund is off to a promising start. From its inception through 2018, the fund has almost doubled the Russell 2000 Growth Index and is a top performer in the small-growth Morningstar Category. However, investors should brace for the volatility that often comes with such eye-popping returns, exhibited by the fund’s bottom-decile 2015 result. Bieger and Gwirtzman haven't been tested by a sustained market downturn, and above-average expenses are a headwind. However, we believe the $400 million fund could be an intriguing, open small-cap option.

Join Morningstar analysts for a webinar to learn about Morningstar's latest list of up-and-coming and under-the-radar strategies. Watch Now.

The full list and publication are available in Morningstar Direct℠ Research Portal. If you’re a user, you have access. If not, take a free trial.

Please see below for important disclosure.

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Important Disclosure

The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law, Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner, without the prior written consent of Morningstar. Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. The Morningstar Analyst Rating™ is not a credit or risk rating. It is a subjective evaluation performed by Morningstar’s manager research group, which consists of various Morningstar, Inc. subsidiaries (“Manager Research Group”). In the United States, that subsidiary is Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Commission. The Manager Research Group evaluates funds based on five key pillars, which are process, performance, people, parent, and price. The Manager Research Group uses this five pillar evaluation to determine how they believe funds are likely to perform relative to a benchmark, or in the case of exchange-traded funds and index mutual funds, a relevant peer group, over the long term on a risk-adjusted basis. They consider quantitative and qualitative factors in their research, and the weight of each pillar may vary. The Analyst Rating scale is Gold, Silver, Bronze, Neutral, and Negative. A Morningstar Analyst Rating of Gold, Silver, or Bronze reflects the Manager Research Group’s conviction in a fund’s prospects for outperformance. Analyst Ratings ultimately reflect the Manager Research Group’s overall assessment, are overseen by an Analyst Rating Committee, and are continuously monitored and reevaluated at least every 14 months. For more detailed information about Morningstar’s Analyst Rating, including its methodology, please go to The Morningstar Analyst Rating (i) should not be used as the sole basis in evaluating a fund, (ii) involves unknown risks and uncertainties which may cause the Manager Research Group’s expectations not to occur or to differ significantly from what they expected, and (iii) should not be considered an offer or solicitation to buy or sell the fund.