Future Opportunities: Our Latest Prospects List

Before an active strategy makes it into Morningstar's widely-followed analyst coverage, it's in our Prospects List. Find out what's up-and-coming in my conversation with the list's author

Lukas Strobl 2 August, 2022 | 10:00AM Jeffrey Schumacher, CFA
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Lukas Strobl: With me today is Morningstar's Director of European Manager Research, Jeff Schumacher. Jeff, you just launched the Morningstar Prospects EMEA and Asia Report. Can you tell us what that is all about?

Jeffrey Schumacher: Yeah, sure Lukas. So, the Morningstar Prospects List is a semiannual listing of promising actively managed strategies that we believe are worth  greater investor attention, but that are not yet covered by Morningstar's manager research team. So, our European and Asia-based analysts cover approximately 1,200 actively and passively managed strategies, which all carry a Morningstar Analyst Rating. But on top of that, we are constantly monitoring the wider fund universe in order to identify strategies that we think have potential and which we may ultimately add to our coverage. So, the prospects list essentially presents the ideas that we currently have on our radar.

Strobl: And how many funds are on that list?

Schumacher: Yeah, so, in this 11th edition of the prospects list we present a list of 33 strategies that we think have merit and are worth investors' consideration. So, since our last edition we have removed 11 funds from the list. Having monitored those strategies for a couple of years, we arrived to the conclusion for some of them that they don't have enough merit to be considered for full coverage. However, we have also decided to graduate two strategies from the prospect list that will get a Morningstar Analyst Rating in the second half of the year.

Strobl: Now, one of those two will be JPMorgan Emerging Markets Sustainable Equity. What sets it apart from the rest?

Schumacher: Yeah. So, this strategy is managed by Amit Mehta and John Citron who are members of the Fundamental Emerging Market team of JPMorgan that is led by Austin Forey. So, the managers are well backed up by a large team of analysts, so a 100-member emerging markets and Asia Pacific specialist team. The strategy also leverages on the fundamental investment approach that has been applied here since 1994 at JPMorgan, and it's an approach that we already rate positively across a number of emerging market strategies that we already cover. So, for this strategy in particular, the managers added a sustainability overlay to the approach. So, it invests basically in what the managers see as the sustainable leaders and the best-in-class companies within their industries.

Strobl: In this report, you've just added nine strategies. Any ones you'd like to highlight?

Schumacher: Yeah. So, within the allocation space, for example, we have added DWS Invest Conservative Opportunities to the list. So, this strategy is the latest product in the Multi Asset Total Return range of DWS and is managed since 2019, its inception, by Thomas Graby. So, the strategy aims to maximize long-term risk-adjusted returns within a volatility range of 2% to 5%. It applies the so-called modular portfolio construction approach, where a large part of the portfolio's assets are allocated to DWS Concept Kaldemorgen and also to DWS ESG Dynamic Opportunities, which are two strategies that are covered by Morningstar's analysts already and also carry Morningstar Analyst Ratings and medalist ratings, by the way. Furthermore, the fund-of-funds structure also allows the managers to invest in Xtrackers sector ETFs but also in quantitative liquid alternative strategies.

Strobl: Many promising ideas but not all of them will actually make it into Morningstar's coverage. What does it take to set a fund apart and for that fund to graduate into our coverage list?

Schumacher: Yeah, that's really a combination of several factors. For example, client demand, but also the quality of our current coverage in certain Morningstar categories. But above all, I think it really is decided by the analysts' conviction in a strategy's ability to generate a positive alpha after fees over a full market cycle. So, that means that an analyst must have a high conviction in a team that is managing the strategy, but also in the quality of the investment approach and execution. So, that confidence, that level of confidence is typically gained through the various meetings that we have with portfolio managers before making the decision to graduate a strategy to full coverage.

Strobl: An exciting product to see what's out there and what's coming up. Thank you for explaining this, Jeff. For Morningstar, I'm Lukas Strobl.

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Lukas Strobl  is the editorial manager for EMEA at Morningstar.

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