Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Jeffrey Schumacher. He is Director of Manager Research at Morningstar. Hello.
Jeffrey Schumacher: Hi, Holly.
Black: So, Jeffrey, you've just launched the latest edition of your prospects list. What is this list all about?
Schumacher: Yeah. So, the Morningstar prospects list is a semi-annual listing of promising actively managed strategies that believe are worth greater and faster attention but that are not yet covered by Morningstar's manager research team. So, our Europe and Asia based analysts cover around 1,200 strategies, both actively and passively managed funds, that all carry a Morningstar analyst rating. But we are constantly monitoring the wider fund universe in order to try to find interesting strategies that we want to add to our coverage list. So, those prospects could be strategies that are unique, or it could be funds under new management, it could be a new fund that is managed by a very experienced portfolio manager or a strategy that looks promising but isn't well known to the wider public.
Black: Okay. So, funds that don't yet have one of the gold, silver, bronze, neutral, negative ratings but might do in the future. How many funds are on the prospects list?
Schumacher: Yeah. So, the latest list features 49 strategies that we think have merit and are worth investors' consideration. So, since the last edition we have removed 70 strategies from the list of which six will graduate to full coverage and will receive a Morningstar analyst rating by the end of the year.
Black: Okay. So, can you tell us about a couple of those that are going to graduate?
Schumacher: Definitely. So, one of the funds that will be graduated to full coverage is Trojan Global Income Fund which is managed by the seasoned dividend investor James Harries. So, James Harries used to manage Newton's Global dividend strategy quite successfully actually from 2005 until 2015 before moving to Troy Asset Management. So, here at Troy, he has launched this Global dividend strategy which is known for its patience but also its concentrated portfolio and quality-driven investment style.
So, there were also a couple of other more sustainable equity funds on the prospects list that will graduate to full coverage in the second half of the year and among them was also NN European Sustainable Equity which is managed by a seasoned trio of portfolio managers who are backed by seven dedicated analysts. So, this fund's sustainability screening is focused on a combination of ESG momentum, controversy and activity exclusion and positive selection and interestingly, the portfolio managers have also increased portfolio concentration over time.
Black: Okay. So, their funds are moving from the prospects list a full rating. Can you tell us about a couple of the funds that are newly added to the prospects list?
Schumacher: Certainly. So, over the past six months we have identified 19 new strategies that have been approved as members of the prospects list and among them are several funds of Wellington Management including Wellington Global Research Equity. So, this multi-manager strategy benefits from the firm's 54 strong analyst team of which 26 members are actually managing a sleeve in this portfolio. So, each of the portfolio managers or analysts is focusing on his own expertise and really has developed his own investment style and process, so to say. So, all these different sources of alpha have actually led to an impressive track record over time.
Within fixed income, we added two ESG versions of proven concepts to the list – BSF ESG Euro Bond Fund and BSF ESG Euro Corporate Bond Fund are managed by BlackRock's established Euro Fixed Income team which is known for its talented and experienced portfolio managers in addition to a larger group of analysts who basically cover the full range of global sovereigns and corporate debt. So, here at this strategy third-party data as well as internal research and tools are used to apply ethical filters, negative exclusionary screens but also positive best-in-class screening which they apply to the entire investment universe.
Black: Okay. So, what does it take for a fund to graduate from the prospects list to getting a full analyst rating?
Schumacher: Here, there are several factors at play actually. It's a combination of several things. Like, for example, client demand or the quality of coverage that we have in certain categories. But I would say above all the analysts covering the strategy must have the conviction in a strategy's ability to generate a positive alpha after fees over a full market cycle. So, that means that the analyst needs to be convinced of the team that is running the strategy but also the investment process. And we gain that conviction through the several meetings that we have with portfolio managers before making a decision to graduate a strategy to full coverage.
Black: Jeffrey, thank you so much for your time. For Morningstar, I'm Holly Black.
