4 New Funds on Our Radar

4 New Funds on Our RadarOur analysts added these promising mutual funds and target-risk series to the Morningstar Prospects list.

4 New Funds on Our Radar

Morningstar Prospects, a list of up-and-coming or under-the-radar investment strategies that Morningstar Manager Research thinks might be worthy of eventual full coverage, added four new strategies in the second half of 2021.

Here’s a look at the strategies that the team added to the January 2022 list and what each has to offer.

Pzena Emerging Markets Value (PZIEX)

Pzena Emerging Markets Value is an up-and-coming deep-value strategy that isn’t for the faint of heart but has plenty of merit. New York City-based Pzena boasts a deep research team and a time-tested approach. The 27 members of its investment team, led by co-CIOs Rich Pzena and John Goetz, are true value disciples. They rank stocks based on a proprietary price/normalized earnings metric, then buy only stocks in the cheapest 20% of this cohort whose issues are temporary rather than permanent. This focus on beaten-up fare leads to a differentiated portfolio of roughly 50 stocks that have price multiples unsurprisingly far below the MSCI Emerging Markets Index’s. Most of the fund’s assets are invested in Asian markets, such as South Korea, China, and Taiwan, though it also owns developed-markets stocks like Standard Chartered and Cognizant Technology, which have high emerging-markets revenue exposure. Goetz has been a named manager here since the fund’s 2014 launch but stepped back in January 2022. He retained his co-CIO role, and the impact shouldn’t be noticeable here given the team-managed approach. Comanagers Allison Fisch, Caroline Cai, and Rakesh Bordia are experienced and impressive. Fees are a headwind here, however, ranking average and above average for each share class.  

Virtus KAR Mid-Cap Growth (PHSKX)

Virtus affiliate Kayne Anderson Rudnick is a proven quality-oriented manager with funds that are already Morningstar Medalists, and though this strategy leans more heavily into fast-growing companies, it has put up similarly stellar results. KAR CIO Doug Foreman is the lead manager and brings a wealth of experience from his time at other firms, including Putnam and TCW. Foreman borrows elements of KAR’s long-term focus on business quality but is more willing to invest in faster-growing businesses with both greater volatility and upside. Key winners include innovative companies such as Netflix (NFLX) and The Trade Desk (TTD), but also some steadier growers such as Pool Corp (POOL). Foreman prudently keeps a more diversified portfolio than some of his colleagues to help mitigate the portfolio’s swings.

Foreman receives support from co-portfolio manager Chris Armbruster and two additional analysts, though additional support may be on the way. KAR typically keeps its teams small, a trait Foreman believes helps foster better intellectual honesty and decision-making. Performance across the firm’s fund lineup suggests the formula has worked well. While the strategy is a bit of a deviation from KAR’s hallmark focus on business durability, it still bears consideration. At about $3.7 billion in strategy assets, this mid-cap fund has room to grow.

Aristotle International Equity (ARSFX)

Sean Thorpe and Geoffrey Stewart have successfully led Aristotle International Equity since the fund’s March 2014 inception, and they have run the same strategy via a separate account since January 2008. Howard Gleicher, Aristotle’s CEO and CIO, rounds out the management team, which boasts 31 years of experience on average. The managers (who also serve as analysts) are part of a broader 13-member research group, which is very stable and experienced. Most investment team members own equity in the firm, giving them incentive to stick around. The firm follows a similar long-term-oriented approach across its fund lineup, looking for firms that have sustainable competitive advantages and are trading at attractive valuations and have a path for improvement. This balanced approach contributes to a portfolio that typically lands in the core column of the Morningstar Style Box and helps it do well across different market environments. The portfolio is compact–holding just 30-40 stocks–and has wide leeway at the country and sector levels, so active share regularly exceeds 90%. A reasonable expense ratio of 0.80% for its lone share class is another reason this fund is worth a closer look.

iShares ESG Aware Allocation Series

The iShares ESG Aware Target Allocation series integrates environmental, social, and governance factors without sacrificing the benefits of a broadly diversified portfolio. The series also comes at a low cost of 0.18%.

This target-risk series of exchange-traded funds is overseen by a team that leverages BlackRock’s wide breadth of resources and expansive technology. The managers are also in charge of the underlying funds used across this series, including iShares ESG Aware MSCI USA ETF (ESGU) and iShares ESG Aware MSCI EAFE ETF (ESGD); both earn Morningstar Analyst Ratings of Silver.

This series distinguishes itself by exclusively investing in underlying exchange-traded funds that intentionally target securities from companies with favorable ESG characteristics. The team uses ESG scores assigned by MSCI based on ESG risks and opportunities within each industry that could be material to financial performance. The team will favor securities with higher ESG scores and exclude those with worse scores, but the overall portfolio’s sector allocations will remain mostly in line with those of the underlying benchmarks. The team rebalances this series on a semiannual basis (every April and October)

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