Category: Funds

A fund refers to capital belonging to numerous investors used to collectively purchase securities while each investor retains ownership and control of his own shares. An investment fund provides a broader selection of investment opportunities, greater management expertise, and lower investment fees than investors might be able to obtain on their own. Types of investment funds include mutual funds, exchange-traded funds, money market funds, and hedge funds.

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Vanguard LifeStrategy Conservative Growth Fund Investor Shares: Broadly Diversified, Low-Cost, And Effective

Approach

Vanguard’s efficient, low-cost method provides series’ investors with broad market exposure. The sensible and well-executed approach earns a renewed Above Average Process rating. The equity exposure of the four funds in the lineup (Vanguard LifeStrategy Income VASIX, Vanguard LifeStrategy Conservative Growth VSCGX, Vanguard LifeStrategy Moderate Growth VSMGX, and Vanguard LifeStrategy Growth VASGX) is 20%, 40%, 60%, and 80%, respectively. Vanguard’s strategic asset allocation committee and the investment strategy group provide oversight for the fund series. On an annual basis, the committee reviews the allocations, leveraging research produced by the investment strategy group. The committee takes a cautious tack, which results in a relatively modest approach to implementation changes. Prior to 2011, the series included an allocation to a tactical asset allocation strategy, but that piece was removed, resulting in an exclusively passive underlying fund lineup and strictly strategic procedure. International bond exposure was introduced to the series in 2013, and in 2015 international exposure was increased within both the equity and the fixed-income sleeves: non-U.S. stock exposure increased to 40% from 30% and non-U.S. bond exposure increased to 30% from 20%. The firm’s research suggests that a market-cap weighted approach delivers broad exposure and effectively diversifies the funds but cites investors’ home-country preferences.

Portfolio

As of early 2022, the strategies comprising each portfolio receive compelling ratings. The series’ equity sleeves hold Silver-rated Vanguard Total Stock Market Index VTSMX and Gold-rated Vanguard Total International Stock Index VGTSX. On the fixed-income side, the funds tap Vanguard Total Bond Market II Index VTBIX and Vanguard Total International Bond Index VTIBX, both rated Bronze. The latest addition, Vanguard Total International Bond Index II VTIIX, was launched in February 2021 as a clone of Vanguard Total International Bond Index. The fund is exclusively used in the LifeStrategy and the target retirement series, allowing Vanguard to separate transaction costs generated by the massive target retirement series and LifeStrategy from those generated by other investors. Managers began transitioning the international bond exposure to the clone fund in March 2021 and will continue to do so in a tax-sensitive manner. In the wake of a volatile early 2020, the firm updated the threshold rebalancing policy for multi-asset strategies. Prior to 2021, the rebalancing policy stipulated allocation guardrails of 75 basis points; if exceeded, managers rebalanced the allocations to within 50 basis points of the benchmark. As of Jan. 1, 2021, the new guardrails sat at 200 basis points; if exceeded, managers rebalanced the portfolios to within 100 basis points of the target allocations. This change is reasonable and should reduce the strategy’s rebalancing frequency as intended. 

People

Experienced leadership, a multigroup approach, and robust teams across Vanguard merit a renewed Above Average People rating. The LifeStrategy series is managed by the same teams that oversee the firm’s target retirement funds. Vanguard’s strategic asset allocation committee is responsible for ongoing oversight of multi-asset funds. The committee’s 10 voting members include senior leaders across the firm, such as its global chief economist, who also serves as the committee chair. The strategic asset allocation committee is supported by the firm’s investment strategy group, which is composed of a global network of more than 70 investment professionals. Their research covers an array of topics ranging from investor behavior to portfolio construction. Management of the underlying index funds remains stable and well-resourced. Gerard O’Reilly and Walter Nejman manage the U.S. equity index fund, while Michael Perre and Christine D. Franquin cover the international counterpart. O’Reilly and Perre each have roughly three decades of tenure at Vanguard. Franquin and Nejman have spent 21 and 16 years at Vanguard, respectively. Fixed-income manager Joshua Barrickman joined the firm in 1998 and assumed the role of head of fixed-income indexing in the Americas in 2013. Barrickman manages both the domestic and international bond strategies.

Performance 

Over the trailing 10 years ended January 2022, three of the four funds outperformed their target risk Morningstar Category benchmarks and their allocation fund category peer medians in total annualized returns, respectively. The Moderate Growth fund was the exception: it managed to outpace its Morningstar Moderate Target Risk Index category benchmark but underperformed the typical peer in the competitive allocation — 50% to 70% equity category. On a risk-adjusted basis (as measured by Sharpe ratio) over the same period, all four portfolios outperformed their category benchmarks and their average peer constituent. Notably, the two most conservative funds of the series both landed in the best performing deciles of their respective category peer groups while the most risk-tolerant fund landed in the best performing quintile of the allocation — 70% to 85% equity category group. 

The series’ bond sleeves have a higher duration profile relative to peers, which results in greater sensitivity to changes in interest rates. The recent low-yield environment and threat of rising rates presented a challenge to the profiles here, and for the one-year return ended January 2022, all four portfolios underperformed their respective category peer averages and three of the four underperformed their respective category benchmarks. Only the Growth fund outpaced its Morningstar Moderate Aggressive Target Risk Index category benchmark in that period.

About Fund:

The Vanguard Group earns a High Parent rating for its investor-centric ethos, reliable strategies, and democratization of advice. Vanguard is the asset-management industry’s only client-owned firm, and it shows. Vanguard uses the money that its passive strategies make from securities lending to lower if not eliminate headline expense ratios. Modest fees, capable subadvisors, and performance incentives spur its active business to competitive results. Vanguard also offers advice, human and digital, at an accessible cost. All of this helped its global assets under management grow to USD 7.5 trillion as of March 31, 2021. Yet, Vanguard’s non-U.S. business only accounts for a fraction of its assets. Incumbents within many of these markets have sought to keep this low-cost provider at bay. Vanguard has shifted from leading with exchange-traded funds to using advice for entry, such as its joint venture with China’s Ant Financial to offer a mobile-based retail service, which had more than 1 million Chinese users a year after its April 2020 launch. 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Vanguard Real Estate Index Fund Investor Shares: Low cost, no-frills U.S real estate exposure

Approach

Tracking the MSCI U.S. Investable Market Real Estate 25/50 Index yields a broadly diversified portfolio that captures the full scope of opportunities available to U.S. real estate investors. Market-cap weighting channels the market’s collective wisdom and promotes low turnover, underpinning an Above Average Process Pillar rating. This index selects stocks from the MSCI U.S. Investable Market Index, a broad benchmark the spans the complete U.S. stock market. It adds firms that are classified under the real estate sector. This includes equity REITs as well as real estate management and development firms. The fund excludes mortgage and hybrid REITs, which partially derive their revenue through real estate lending.

Portfolio

REITs represent 96% of this portfolio, with real estate management and development firms rounding out the remainder. REITs are required to distribute at least 90% of their taxable income to shareholders, so this fund consistently generates higher yield than the category average. REITs tend to be more sensitive to interest rates than other equity sectors, partially because interest rates directly affect property values. Additionally, their cash flows from rent collection are relatively fixed, making them somewhat bondlike. REITs’ interest-rate sensitivity depends on their lease durations. For example, office REITs (11% of portfolio) tend to be quite sensitive because of their longer lease cycles, but the shorter leases of residential REITs (14%) make them less responsive. Industrial (11%) and retail REITs (9%) tend to fall in the middle. This fund sprinkles investment across an array of property types, ensuring that its fate isn’t tied to a bet on interest rates or one industry’s performance. 

Performance

Specialty REITs have fared very well over the past few years. REITs that own and operate cell towers, like Crown Castle International CC and American Tower ATC, have turned in especially strong performance. This fund invests in specialty REITs more heavily than the category average, so it has reaped strong growth from these sound performers. Specialty REITs tend to be more volatile than other property types, but they have also demonstrated the potential for stronger returns. 

About the Fund

The investment seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments. The advisor attempts to track the index by investing all, or substantially all, of its assets-either directly or indirectly through a wholly owned subsidiary, which is itself a registered investment company-in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The fund is non-diversified.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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One of the cheapest funds tracking the broadly diversified S&P 500.

Investment Objective

Vanguard 500 Index Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks.

Approach

This broadly diversified portfolio is representative of the opportunity set in the large-blend category. It relies on the market’s collective wisdom to size its positions and enjoys low turnover as a result. It earns a High Process Pillar rating. The index pulls in stocks of the largest 500 U.S. companies that pass its market-cap, liquidity, and profitability screens.An index committee selects constituents from this eligible universe, allowing for more flexibility around index changes compared with more-rigid rules based indexes. The index committee aims to avoid unnecessary turnover, and it reconstitutes the index on an as-needed basis. The committee may temporarily deviate from these rules. It may not delete existing constituents that violate eligibility criteria until an addition to the index is warranted.The portfolio managers reinvest dividends as they are paid and use derivatives to equitize cash and keep pace with the benchmark. They have also historically used securities lending to generate additional income for the fund, which has helped tighten the fund’s tracking difference and make up for some of its annual expense ratio.

Portfolio 

Market-cap weighting allows the fund to harness the market’s collective view of each stock’s relative value, and it keeps turnover low. As of January 2022, stocks representing around 90% of the portfolio enjoy either a narrow or wide Morningstar Economic Moat Rating. This weighting scheme pushes the work of sizing positions onto the market. Over the long term, this has been a winning proposition. But the market has manic episodes from time to time. Over shorter time frames, investors’ enthusiasm for a particular stock or sector can make the portfolio top-heavy as it tilts toward recent winners. This has been the case with technology stocks in recent years. The portfolio’s top 10 holdings represented approximately 29% of its assets as of January 2022, higher than its historical average but much lower than the category average. Nonetheless, the fund is still representative of the opportunity set available to its actively managed peers in the large-blend category, and its sector and style characteristics are similar to the category average. As of December 2021, the fund was slightly overweight in tech stocks and made up the difference with a smaller allocation to industrials.

Performance 

From its inception in 2010 through January 2022, the exchange-traded share class outperformed the category average by 2.35 percentage points annualized. Its annual returns consistently ranked in the category’s better-performing half. The fund’s risk-adjusted returns also held up well against category peers, while its Sharpe ratio maintained a top-quartile ranking in the category over the trailing one-, three-, five-, and 10-year periods. Most of this outperformance can be attributed to its low cash drag and competitive expense ratio.

The portfolio tends to perform as well as its category peers during downturns while outperforming during market rallies. It captured 96% of the category average’s downside and 106% of its upside during the trailing 10 years ending in 2022. During the initial coronavirus-driven shock from Feb. 19 to March 23, 2020, the fund outperformed the category average by 9 basis points. It then bounced back faster than peers during the recovery phase from late March through December 2020, gaining 3.29 percentage points more than the category average. 

Tracking performance has been solid. Over the trailing one-, three-, five-, and 10-year periods ended January 2022, the fund trailed the S&P 500 by an amount approximating its annual expense ratio.

Top 10 Holdings

About the fund

The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index. The 500 Index Fund is a low-cost way to gain diversified exposure to the U.S. equity market. The key risk for the fund is the volatility that comes with its full exposure to the stock market. Because the 500 Index Fund is broadly diversified within the large-capitalization market, it may be considered a core equity holding in a portfolio.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Neuberger Berman International Equity Fund Investor Class

Process:

This strategy’s distinctive approach remains in place under its new leader, earning it an Above Average Process rating. Former lead manager Benjamin Segal said he favoured the mid-cap universe because firms of that size–along with those in the smaller part of the large-cap range–tend to be well-enough established that they can withstand some setbacks but remain less familiar to many global investors and thus often sell at attractive prices. They can also be takeover targets. Former comanager Elias Cohen, who became lead manager upon Segal’s departure on June 30, 2021, follows the same approach. This team wants steadily growing firms, but it also focuses on the quality of company management. The team is willing to own firms without hefty margins if other traits are impressive. The strategy has a 15% limit on emerging-markets exposure, but the portfolio has been far below that for a long time. The turnover rate tends to be moderate. Ideas can come from Cohen, comanager Tom Hogan, or the analysts, and decision-making is collaborative, though the lead manager has final authority for portfolio decisions.

Portfolio:

Portfolio shows that this fund makes fuller use of the market-cap spectrum than most peers and its chosen benchmark, the MSCI EAFE Index. The fund had about 33% of its assets in midcaps and another 4% in small caps (as classified by Morningstar), versus just 10% in mid-caps and almost nothing in small caps for the index and just slightly higher figures for the foreign large-growth and foreign large-blend category averages. The portfolio’s figures are nearly identical to those from one year earlier, showing that new lead manager Elias Cohen has maintained the strategy’s broad market-cap approach even as he traded several stocks into and out of the portfolio. Cohen, like former manager Benjamin Segal, favours the mid-cap and smaller large-cap universes. The portfolio often lies on the border between the growth and blend portions of the style box, but the latest portfolio is fully in the blend region. The strategy continues to spread its assets widely, with none of the 78 stocks receiving more than 2.6% of assets. Emerging-markets exposure remains below 5% and is limited to China and India.

People:

This strategy’s long-tenured lead manager, Benjamin Segal, left Neuberger Berman on June 30, 2021, to become a high school math teacher. Replacing him as lead manager was former comanager Elias Cohen. The firm had earlier promoted Thomas Hogan from the analyst ranks to comanager on Jan. 20, 2021. Cohen had worked with Segal for almost 20 years, most recently as comanager–for two years on this strategy and four years on sibling Neuberger Berman International Select NILIX. The analyst staff remained intact including one addition in March 2021. Three of the six members of the analyst team have been in place since 2008 or earlier. They and the managers also talk with the members of Neuberger Berman’s emerging-markets team. Cohen and Hogan each have more than $1 million invested in this strategy.

Performance:

It’s a bit complicated assessing this fund’s performance, but all in all, the fund has a solid record as a core international equity choice. This fund launched in 2005 and was known until late 2012 as Neuberger Berman International Institutional. But an identical fund that was merged into it in January 2013 posted a strong 10-year record prior to the merger, using the same strategy, under recently departed lead manager Benjamin Segal. Another complication is that although this fund’s growth leanings result in its placement in the foreign large-growth category, it is not very aggressive in that direction, with its portfolio often landing around the border between growth and blend or, as currently, in the blend box. That’s typically been a disadvantage versus growthier rivals for a long time. The managers aim to outperform when markets tumble; although it did not do so in the bear market of early 2020, it did hold up well during the 2014 sell-off and the 2015-16 bear market.

(Source: Morningstar)

Price:

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-costliest quintile. That’s poor, but based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we still think this share class will be able to overcome its high fees and deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Bronze.

Top Portfolio Holdings:  
Asset Allocation:  

 


(Source: Morningstar)                                                                     (Source: Morningstar)

About Funds:

A growing conviction in the duo that manages JPMorgan U.S. Large Cap Core Plus and its Luxembourg resided sibling JPM U.S. Select Equity Plus, and the considerable resources they have effectively utilised, lead to an upgrade of the strategy’s People Pillar rating to Above Average from Average. The strategy looks sensible and is designed to fully exploit the analyst recommendations by taking long positions in top-ranked companies while shorting stocks disliked by the analysts. Classic fundamental bottom-up research should give the fund an informational advantage. The portfolio is quite diversified, holding 250-350 stocks in total with modest deviations from the category index in the long leg. The 30/30 extension is broadly sector-, style-, and beta-neutral. Here the managers are cognizant of the risks of shorting stocks, where they select stocks on company-specific grounds or as part of a secular theme. For example, the team prefers semiconductors, digital advertising, and e-commerce offset by shorts in legacy hardware, media, and network providers. Short exposure generally stands at 20%-30%, with the portfolio’s net exposure to the market kept at 100%. The strategy’s performance since inception, which still has some relevance given Bao’s involvement, has been outstanding.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Vanguard Energy Fund Investor Shares: An energy hybrid sensible

Approach

In late 2020, Vanguard changed this strategy’s prospectus benchmark from the MSCI ACWI Energy Index to the MSCI ACWI Energy + Utilities Index (a custom benchmark that splices the MSCI ACWI Energy and MSCI ACWI Utilities indexes). The firm made the change so this strategy could capitalize on the evolution away from fossil fuels and toward renewable energy sources by investing significantly more in electric and other utilities.

Portfolio

The MSCI ACWI Energy + Utilities Index is a dynamic benchmark, and its sector weights vary based on the performance of energy stocks versus utilities stocks. Meanwhile, the MSCI ACWI Energy Index gained 36% in 2021, whereas the MSCI ACWI Utilities Index returned 10% last year. The MSCI ACWI Energy + Utilities Index’s energy stake increased to 56% as of Dec 31, 2021, as result, while its utilities position decreased to 44% (per Vanguard data).

People

Tom Levering has good credentials for picking utilities stocks as well as energy equities. For starters, he spent several years as a utilities consultant before joining Wellington in 2000, and he served as an energy and utilities analyst for roughly two decades–and led Wellington’s combined energy/utilities team for a few years–before he took charge of this fund in early 2020.

Performance

The Investor share class of this strategy recorded a 27.7% gain in 2021. That’s significantly less than the 36.0% and 44.8% returns posted by the MSCI ACWI Energy Index and the average fund in the energy equity Morningstar Category, respectively. But this strategy is an energy/utilities hybrid that began 2021 with roughly 48% of its assets in utilities stocks and ended the year with roughly 44% of assets in such names, and the MSCI ACWI Utilities Index produced a gain of just 10.1% last year. The Investor share class’ 27.7% gain is significantly better than the 23.6% return of a 50/50 MSCI ACWI Energy/Utilities custom index and better than the 23.0% return of the strategy’s custom prospectus benchmark.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Low-cost diversified ESG-focused Australian equity exposure

Young woman trading stock market by touching.

Investment Objective

Vanguard Ethically Conscious Australian Shares Fund seeks to track the return of the FTSE Australia 300 Choice Index before taking into account fees, expenses and tax.

Approach

This fund seeks to provide broad ESG-focused Australian share market exposure in a passively managed, taxefficient vehicle. To achieve that goal, it uses an index-replication approach to track the FTSE Australia 300 Choice Index, a derivative of the FTSE Australia 300 Index. The index is arrived at by excluding companies that deal significantly in business activities involving fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons, and adult entertainment. Additionally, a screen is also applied to filter out names embroiled in severe controversies. Vanguard holds all the securities that make up the index with industry-level exposure limit set at 5 percentage points relative to the parent index. Security weights are approximately the same proportion as the index’s weights. However, the portfolio will deviate from the index when the managers believe such deviations are necessary to minimize transaction costs. The fund may also be exposed to securities that have been removed from or are expected to be included in the index.

Portfolio

The portfolio is top-heavy, with about half of the index in the top 10 companies. The concentration in banks skews the fund’s sector weights, with financial services forming around 34.5% of the portfolio (versus 26.8% for the Morningstar Category average). The basic material is the second-largest sector exposure, but it is meaningfully lower than the category index because of the ESG screening. The industry capping of 5 percentage points further adds to the portfolio diversification. VETH’s market cap does not deviate materially from the category average or index. As such, the average market of the strategy is AUD 25.3 billion versus AUD 29.2 billion for the S&P/ ASX 200 Index category benchmark. Broadly, the portfolio is diversified and offers exposure to almost the entire opportunity set of the domestic equity market. As a result, it has significant overlap with Vanguard’s other broad-based domestic equity products like VAS, both in terms of style and exposure, making it suitable as a core holding.

Performance

Launched in October 2020, the strategy has a very short track record. The trailing nine-month period has been eventful for the domestic equity market with yields moving up and value factor rotation. As such, the fund’s performance has been eventful as well in tandem with broader market movements. From its inception through July 2021, the strategy has closely mirrored the underlying index but trailed the S&P/ASX 200 category benchmark by 87 basis points. As the materials, energy, and commodity sectors rallied during this period, the fund’s relative underweighting in these sectors has hurt performance. As the value factor rebounded toward the end of last year through the first half of 2021, the modest growth tilt of the strategy relative to the category index detracted. Growth names like A2 Milk have been the major contributor to underperformance during this period. Investors should be cautious and not extrapolate this performance, however. Based on the past attributes, investors may expect similar cyclicality in performance tied to the broader domestic economic activities and value/growth factor rotation.

Top 10 Holdings of the fund

About the fund

The Fund provides low cost exposure to stocks listed on the Australian Securities Exchange (ASX) and excludes companies with significant business activities involving fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons, adult entertainment and a conduct related screen based on severe controversies. Diversification requirements are applied to restrict the proportion of the index invested in any one industry to +/-5% of the industry weights of the FTSE Australia 300 Index, subject to any limitation issues resulting from the exclusionary screening.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

JPMorgan U.S. Large Cap Core Plus Fund performing well with solid philosophy and consistently applied bottom-up process

Process:

The strategy rests on a solid philosophy and a clearly designed and consistently applied bottom-up process. The ability to leverage the analysts’ insights through both long and short positions makes it distinctive, though small active bets make us somewhat cautious regarding its alpha potential. The strategy aims to capture temporarily mispriced opportunities through consistent use of the analysts’ long-term valuation forecasts. Those derive from an in-house dividend-discount model that is fed by the team’s earnings, cash flow, and growth-rate estimates. The analysts rank stocks in each industry based on their estimated fair value. The managers incorporate these rankings into their stock-picking, expressing modest sector preferences based on their macroeconomic view.

Portfolio:

This benchmark-aware and highly diversified fund held 289 stock positions per end of November 2021, of which 124 are shorts. The long leg of the fund is conservatively managed, with modest bets versus the Russell 1000 Index and an active share of 55%-60%. NXP Semiconductors, Alphabet, and Amazon.com were the largest active positions in the portfolio, with an overweight of around 200 basis points. Rivian was bought in 2021 for risk-management considerations to offset the underweight of Tesla, which the managers never held. Most stocks that are sold short in the 30/30 extension carry a weight of less than 25 basis points.

People:

Growing confidence in the two experienced portfolio managers and the large and seasoned analyst team supporting them leads to an upgrade of the People Pillar rating to Above Average from Average. Susan Bao is an experienced and long-tenured manager on this strategy and is well-versed in the firm’s hallmark investment process. Bao and Luddy have also managed this 130/30 strategy together since the start of the U.S.-domiciled vehicle in 2005 and since 2007 on its offshore counterpart. Steven Lee succeeded Luddy in 2018. Lee brings close to three decades of experience, but most of it was gained as an analyst. Since 2014, he has managed JPMorgan US Research Enhanced Equity, the firm’s analyst-driven long-short strategy, which serves as the blueprint for this strategy’s 30/30 extension. Although portfolio management is collegial, Bao concentrates on consumer, financials, and healthcare, while Lee is the lead for industrial/commodities, technology, and utilities/telecom. While their collaboration is still relatively short, it has already proved fruitful, and the managers have demonstrated their ability to generate alpha from both long and short ideas provided by the analyst team.

Performance:

It has outperformed the Russell 1000 Index on a total return and alpha basis since inception and over shorter time horizons. Since Susan Bao and Steven Lee have comanaged the strategy, a more relevant period to consider, the strategy also outperformed its average peer and the index. However, results were a bit mixed during that period, with a disappointing performance in 2018 offset by successful stock-picking predominantly in 2020 and 2021. The strategy had a good year in 2021, as stock selection in the long-leg and in the market-neutral component contributed positively. Positions in semiconductors, banks, and energy helped.

Table Description automatically generated

(Source: Morningstar)

Price:

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s costliest quintile. Such high fees stack the odds heavily against investors. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.


(Source: Morningstar)                                                                     (Source: Morningstar)

About Funds:

A growing conviction in the duo that manages JPMorgan U.S. Large Cap Core Plus and its Luxembourg resided sibling JPM U.S. Select Equity Plus, and the considerable resources they have effectively utilised, lead to an upgrade of the strategy’s People Pillar rating to Above Average from Average. The strategy looks sensible and is designed to fully exploit the analyst recommendations by taking long positions in top-ranked companies while shorting stocks disliked by the analysts. Classic fundamental bottom-up research should give the fund an informational advantage. The portfolio is quite diversified, holding 250-350 stocks in total with modest deviations from the category index in the long leg. The 30/30 extension is broadly sector-, style-, and beta-neutral. Here the managers are cognizant of the risks of shorting stocks, where they select stocks on company-specific grounds or as part of a secular theme. For example, the team prefers semiconductors, digital advertising, and e-commerce offset by shorts in legacy hardware, media, and network providers. Short exposure generally stands at 20%-30%, with the portfolio’s net exposure to the market kept at 100%. The strategy’s performance since inception, which still has some relevance given Bao’s involvement, has been outstanding. 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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JPMorgan U.S. Large Cap Core Plus Fund performing well with solid philosophy and consistently applied bottom-up process

Process:

The strategy rests on a solid philosophy and a clearly designed and consistently applied bottom-up process. The ability to leverage the analysts’ insights through both long and short positions makes it distinctive, though small active bets make us somewhat cautious regarding its alpha potential. The strategy aims to capture temporarily mispriced opportunities through consistent use of the analysts’ long-term valuation forecasts. Those derive from an in-house dividend-discount model that is fed by the team’s earnings, cash flow, and growth-rate estimates. The analysts rank stocks in each industry based on their estimated fair value. The managers incorporate these rankings into their stock-picking, expressing modest sector preferences based on their macroeconomic view.

Portfolio:

This benchmark-aware and highly diversified fund held 289 stock positions per end of November 2021, of which 124 are shorts. The long leg of the fund is conservatively managed, with modest bets versus the Russell 1000 Index and an active share of 55%-60%. NXP Semiconductors, Alphabet, and Amazon.com were the largest active positions in the portfolio, with an overweight of around 200 basis points. Rivian was bought in 2021 for risk-management considerations to offset the underweight of Tesla, which the managers never held. Most stocks that are sold short in the 30/30 extension carry a weight of less than 25 basis points.

People:

Growing confidence in the two experienced portfolio managers and the large and seasoned analyst team supporting them leads to an upgrade of the People Pillar rating to Above Average from Average. Susan Bao is an experienced and long-tenured manager on this strategy and is well-versed in the firm’s hallmark investment process. Bao and Luddy have also managed this 130/30 strategy together since the start of the U.S.-domiciled vehicle in 2005 and since 2007 on its offshore counterpart. Steven Lee succeeded Luddy in 2018. Lee brings close to three decades of experience, but most of it was gained as an analyst. Since 2014, he has managed JPMorgan US Research Enhanced Equity, the firm’s analyst-driven long-short strategy, which serves as the blueprint for this strategy’s 30/30 extension. Although portfolio management is collegial, Bao concentrates on consumer, financials, and healthcare, while Lee is the lead for industrial/commodities, technology, and utilities/telecom. While their collaboration is still relatively short, it has already proved fruitful, and the managers have demonstrated their ability to generate alpha from both long and short ideas provided by the analyst team.

Performance:

It has outperformed the Russell 1000 Index on a total return and alpha basis since inception and over shorter time horizons. Since Susan Bao and Steven Lee have comanaged the strategy, a more relevant period to consider, the strategy also outperformed its average peer and the index. However, results were a bit mixed during that period, with a disappointing performance in 2018 offset by successful stock-picking predominantly in 2020 and 2021. The strategy had a good year in 2021, as stock selection in the long-leg and in the market-neutral component contributed positively. Positions in semiconductors, banks, and energy helped.

Table Description automatically generated

(Source: Morningstar)

Price:

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s costliest quintile. Such high fees stack the odds heavily against investors. Based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.


(Source: Morningstar)                                                                     (Source: Morningstar)

About Funds:

A growing conviction in the duo that manages JPMorgan U.S. Large Cap Core Plus and its Luxembourg resided sibling JPM U.S. Select Equity Plus, and the considerable resources they have effectively utilised, lead to an upgrade of the strategy’s People Pillar rating to Above Average from Average. The strategy looks sensible and is designed to fully exploit the analyst recommendations by taking long positions in top-ranked companies while shorting stocks disliked by the analysts. Classic fundamental bottom-up research should give the fund an informational advantage. The portfolio is quite diversified, holding 250-350 stocks in total with modest deviations from the category index in the long leg. The 30/30 extension is broadly sector-, style-, and beta-neutral. Here the managers are cognizant of the risks of shorting stocks, where they select stocks on company-specific grounds or as part of a secular theme. For example, the team prefers semiconductors, digital advertising, and e-commerce offset by shorts in legacy hardware, media, and network providers. Short exposure generally stands at 20%-30%, with the portfolio’s net exposure to the market kept at 100%. The strategy’s performance since inception, which still has some relevance given Bao’s involvement, has been outstanding. 

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Funds Funds

The Hartford Capital Appreciation Fund Class C Soaring High, But a Little Safety Won’t Hurt

Process:

Lingering uncertainty about this factor-oriented fund’s potential for sleeve manager and style changes keeps its Process rating at Below Average. 

Between March 2013 and the end of 2017, Wellington Management’s investment strategy and risk group altered this fund from a wide-ranging, single-manager offering to its current form. Six managers now run separate sleeves of the portfolio. The sleeves vary in size, but each is concentrated in 50 or fewer stocks and has distinct emphases, whether value or growth, market cap, or domicile. Gregg Thomas, who took over the investment strategy and risk group in late 2018, controls the aggregate portfolio’s characteristics by adjusting the size of Thomas Simon’s sleeve, which uses a multifactor approach to complement the five other sleeves, and by shifting assets among or even swapping managers to match the Russell 3000 Index’s risk profile. The idea is to let the stock-pickers rather than size, sector, or factor bets drive performance. 

Although regular line-up changes have made it difficult to assess the strategy, there could be more stability in the future. Thomas now envisions making a manager change every three to five years, on average, down from every two years when he took over in 2018. The current roster has been stable only since late 2019, however, when Thomas changed two managers, including replacing a veteran global manager with a relatively inexperienced mid-cap value manager.

Portfolio:

A rotating cast of six sleeve managers has had collective charge of the portfolio since the late 2017 retirement of long-time sole manager Saul Pannell. His departure concluded a transition that started in March 2013 when Wellington Management’s investment strategy and risk group began apportioning 10% of the fund’s assets to different managers–a total that hit 50% by mid-2014 and stayed there until early 2017, after which the group gradually redirected Pannell’s remaining assets. 

The transition to a multimanager offering beginning in 2013 ballooned the portfolio’s number stocks to 350- plus before falling to around 200 since April 2017. The fund’s sector positioning versus the Russell 3000 Index began to moderate in 2013 and has since typically stayed within about 5 percentage points of the benchmarks. Its tech underweighting dipped to nearly 10 percentage points in November 2020 but was back to around 5 percentage points by late 2021. 

Industry over- and underweighting’s tend to stay within 4 percentage points. In late 2021, however, the portfolio was 5.6 percentage points light in tech hardware companies, entirely because it did not own Apple AAPL. The fund’s non-U.S. stock exposure neared 30% of assets in 2014 but has been in the single digits since late 2019, when a domestic-oriented mid-cap value sleeve manager replaced a sleeve manager with a global focus. 

People:

The fund earns an Above Average People rating because its subadvisor’s multimanager roster includes veterans who have built competitive records elsewhere at sibling strategies where they also invest alongside shareholders. Those managers, however, serve this fund at the behest of Wellington Management’s Gregg Thomas. He took over capital allocation and manager selection duties at year-end 2018, when he became director of the investment strategy and risk group. Between March 2013 and year-end 2017, this group changed the fund from a wide-ranging single-manager offering to a multimanager strategy. Six managers now oversee separate sleeves of the portfolio. Growth investor Stephen Mortimer, dividend-growth stickler Donald Kilbride, and contrarian Gregory Pool each run 15%-25% of assets; mid-cap specialists Philip Ruedi and Gregory Garabedian 10%-20% each; and Thomas Simon uses a multifactor approach on 5%-20% assets to round out the whole portfolio’s characteristics. Thomas monitors those characteristics and redirects assets or even swaps managers to match the Russell 3000 Index’s risk profile, leaving it up to the stock-pickers to drive outperformance. That’s led to considerable manager change here. Of the original seven sleeve managers the investment strategy and risk group installed in March 2013, only Donald Kilbride remains; and the current six-person roster has been in place only since Sept. 30, 2019.

Performance:

This multimanager offering has struggled since Wellington Management’s Gregg Thomas took over capital allocation and manager selection duties at year-end 2018. Through year-end 2021, the A shares’ 22% annualized gain lagged the Russell 3000 Index and large-blend category norm by 3.8 and 0.8 percentage points, respectively, with greater volatility than each. The fund also has not distinguished itself since its current six-person sleeve manager stabilized on Sept. 30, 2019.

The fund was competitive in 2019’s rally and in 2020’s market surge following the brief but severe coronavirus-driven bear market. Of those two calendar years, the fund fared best against peers in 2020, with a top-quartile showing. But in neither year did it beat the index. 

Results in 2021 were then relatively poor. The A shares’ 15.2% gain trailed the index by 10.5 percentage points and placed near the peer group’s bottom. It was an off year for the sleeve managers’ stock picking. Especially painful were modest positions in biotechnology stocks Chemocentryx CCXI and Allakos ALLK, whose shares both tumbled after disappointing clinical trial data. 

The fund was lacklustre during its four-plus years of transition from a single-manager offering under Saul Pannell to its current format. From March 2013 to Pannell’s 2017 retirement, its 13.1% annualized gain lagged the index by 1.5 percentage points and placed in the peer group’s bottom half.

About Funds:

The firm maintains a long-standing relationship with well-respected subadvisor Wellington Management Company. Wellington has long run the firm’s equity funds–over half of its $116 billion in fund assets–and took the reins of Hartford Fund’s fixed-income platform beginning in 2012. In 2016, Hartford Funds began offering strategic-beta exchange-traded funds with its acquisition of Lattice Strategies and partnered with U.K.-based Schroders to expand its investment platform further. The Schroders alliance added another strong subadvisor to Hartford’s lineup, with expertise in non-U.S. strategies. Hartford Funds mostly leaves day-to-day investment decisions to its well-equipped subadvisors and instead steers product development, risk oversight, and distribution for its strategies. In 2013, the firm reorganized and grew its product-management and distribution effort. Since then, leadership has added resources to its distribution and oversight teams, merged and liquidated subpar offerings, introduced new strategies, evolved its strategic partnerships with MIT AgeLab and AARP, and lowered some fees. That said, fees are still not always best in class but have improved.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Funds Funds

A strong option for investors seeking a low-volatility approach to investing

Fund Objective

The fund aims to achieve capital growth equal to, or greater than the Benchmark with lower volatility over the long term by investing globally in listed securities of companies having their registered office or exercising a preponderant part of their economic activities in emerging countries through the underlying fund.

Approach

The strategy’s robust foundation and consistent execution remain attractive features. The rules based, quantitative process is built on academic research demonstrating low-risk stocks leads to better risk adjusted returns. After an initial liquidity filter, Robeco’s quant model ranks the 2,000-stock universe on a multidimensional risk factor (volatility, beta, and distress metrics), combined with value, quality, sentiment, and momentum factors. In recent years, enhancements to refine the model have been added, including short-term momentum-driven signals that can adjust a stock’s ranking up or down by a maximum 10 percentage points. This should prioritise buy decisions for stocks that rank high in the model and score well on short term signals, and vice versa. From 2020 the team also allows liquid mega-caps to have more weight in the portfolio. Top-quintile stocks are typically included in an optimisation algorithm that considers liquidity, market cap, and 10-percentage-point country and sector limits relative to the MSCI Emerging Markets Index. A 200- to 300-stock portfolio is constructed with better ESG and carbon footprints than the index; rebalancing takes place monthly, generating annual turnover of about 25%. Stocks are sold when ranking in the bottom 40% of the model.

Portfolio

The defensive nature of the strategy translates into a higher allocation to low-beta and high-yielding stocks in the utilities, consumer staples and communication services sectors, while consumer discretionary stocks are a large underweight. The valuation factors embedded in the model have steered the fund clear from index heavyweight Meituan, while positions in Alibaba and Tencent were sold in August and September 2021, respectively. The quant approach gives management wide latitude to invest across the market-cap spectrum, and the diversified 200- to 300-stock portfolio has long exhibited a small/mid-cap bias compared with the index. However, the team’s decision to increase the maximum absolute weight in mega-caps to 4% from 3% for liquidity purposes has increased top-10 concentration to around 20%, double the level at inception. Still, 29% of assets remain invested outside of large- and mega- caps, about three times the MSCI Emerging Markets index’ allocation.

Performance

This defensive strategy has generally offered good volatility reduction during turbulent markets, capturing 67.77% of the losses of the MSCI Emerging Markets Index since inception, and 76.89% of the upside return. It did not live up to expectations in the coronavirus-dominated markets of 2020, falling more than the index, explained by market dynamics that did not work in its favour. Exposure to dividend stocks and traditional low-risk stocks did poorly compared to high-growth and momentum stocks; the tilt to mid and small caps also detracted. The portfolio lagged during the subsequent recovery that benefited underweight technology and e-commerce stocks. While the value rally in the final quarter did help, cyclical value stocks that are not favoured rallied the most. Consequently, the fund underperformed the Emerging Markets Minimum Volatility Index by 11 percentage points. Things changed in 2021, benefiting from low risk exposure and value tilt during the correction of Chinese e-commerce stocks following a regulatory crackdown. Taiwanese financials and Indian IT stocks aided returns, helping to recoup lost grounds. The fund’s alpha since inception versus the MSCI EM index remains positive, yet slightly behind the minimum volatility index. Although three- and five-year absolute returns have been below index, Sharpe ratios are broadly similar to index with a lower drawdown since inception.

About the fund

The fund aims to achieve capital growth equal to, or greater than the Benchmark with lower volatility over the long term by investing globally in listed securities of companies having their registered office or exercising a preponderant part of their economic activities in emerging countries through the underlying fund.

The investment strategy of the underlying fund seeks to capture the low risk anomaly. Analysis by Robeco has shown that low-risk stocks (in terms of volatility and beta) are able to generate returns equal to, or greater than, the market with lower associated risks. The beta of a stock or portfolio is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that the asset is being compared to.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.