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Diamond Hill High Yield Inv

Bill Zox joined Diamond Hill in 2001 as an equity analyst. He was named a portfolio manager on Diamond Hill Corporate Credit DHSTX in April 2006 before taking over lead management in 2008. John McClain joined the firm in June 2014 as a credit analyst and was also named comanager of Diamond Hill Corporate Credit in February 2015.

The strategy’s investment approach stands out relative to its high-yield bond Morningstar Category peers’. The team focuses on relatively small issues and tends to make sizable bets on its best ideas (up to 10% per issuer), thereby increasing idiosyncratic and liquidity risk. The portfolio has on average about 30% of assets concentrated in its top 10 positions. That said, the team offsets those risks somewhat by treading lightly in the market’s lowest-quality names and limiting how much it will own of an individual issue. This process combines an intrinsic value-driven and contrarian approach to build a high current income portfolio with the opportunity for capital appreciation targeting a high-yield Morningstar Category best-quartile return over rolling five-year periods. While the portfolio’s concentration and idiosyncratic risks are material, the managers’ analytical rigor and responsible balancing of its risks provides comfort.

A distinctive and disciplined investment process

This process combines an intrinsic value-driven and contrarian approach to build a high current income portfolio with the opportunity for capital appreciation targeting a category best-quartile return over rolling five-year periods and a 150 basis points gross excess return over the ICE BofA U.S. High Yield Index benchmark.

Comanagers Bill Zox and John McClain execute a disciplined value approach: They buy issues when their market prices are lower than the team’s estimate of intrinsic business value and sell them when their initial thesis has played out or when there are better opportunities in the market. When valuations get rich and opportunities get scarce, the managers may run a larger-thanpeers allocation to investment-grade bonds to reduce the portfolio’s market risk

The team focuses on relatively small issues and tends to make sizable bets on its best ideas (up to 10% per issuer), thereby increasing idiosyncratic and liquidity risk. The portfolio has on average about 30% of assets concentrated in the top 10 positions. That said, the team offsets those risks somewhat by treading lightly in the market’s lowest-quality names and limiting how much it will own of an individual issue

An opportunistically managed portfolio driven by valuations

In response to the 2019 credit rally, the team raised its investment-grade bond exposure up to 20% at the end of that year, its highest level since the strategy’s January 2015 inception, leaving the strategy in a relatively good position to face the coronavirus-driven sell-off that started at the end of February 2020. As the market plunged, the team rotated capital and pushed the portfolio’s credit quality profile even higher as it found numerous investment-grade opportunities in names that included Nvidia, TJX, and Sysco. At the end of 2020’s first quarter, bonds rated BBB or higher represented close to 34% of assets.

After riding the Fed’s wave of purchases and betting on the economy reopening through the second half of 2020, the managers shifted gears. As valuations got rich, they rotated the portfolio out of some higher-rated longer-duration fare into shorter-maturity higher-yielding securities. At the end of March 2021, investmentgrade bonds represented less than 5% of the strategy’s assets, and its allocation to BB-rated bonds went down to 35% from almost 42% at the end of 2020 while bonds rated B moved the other way to 48% from 41% over the same period.

A category leader with a best-in-class long-term volatility-adjusted record

The team’s attention to valuations together with strong credit selection have helped the strategy hold up better than most rivals during high-yield sell-offs. For instance, despite the energy-led sell-off that started in June 2015, an investment in McDermott International MDR was the largest contributor that year, and the portfolio’s energy stake was the largest relative contributor to the strategy’s 0.3% return, which bested 90% of its category peers. Likewise, the strategy outperformed its typical peer by 184 basis points in the last quarter of 2018 and ended that year ahead of 97% of competitors.

(Source: Morning star)

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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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Invesco Global Growth A

The world large-stock Morningstar Category split into three new groups based on investment style. This offering lands in the world large growth category. That’s appropriate, as it follows a growth-oriented strategy and its primary self-chosen benchmark is the MSCI All Country World Index Growth rather than the core MSCI ACWI, which it considers secondary. That said, the fund’s approach to growth investing is more restrained than those of many other funds in the new category. The managers belong to an Invesco international team that follows a doctrine they call EQV, with valuation being the “V,” and they take that aspect seriously. The fund’s most recent portfolio statistics put it nearly on the border with the blend portion of the Morningstar Style Box, while the average for the world large-growth average is much further into the growth area. Recently, that difference has benefited the fund’s relative ranking in the new category, as value and core have outperformed growth, but longer-term, the opposite is true.

This strategy has been proved on other offerings from the same team that focus exclusively on non-U.S. markets. This one hasn’t had the same level of success, partly owing to that once-deep U.S. underweighting, but also stock selection in that important market was subpar. Selection has improved recently, but the portion of that team focused on the big U.S. market remains just Amerman and two analysts.

The Fund’s Approach

The fund uses the same process that has provided solid long-term returns for a variety of Invesco international funds. It receives an Above Average Process rating. The managers look for sustainable earnings growth available at reasonable valuations and try to avoid companies with high debt levels. They put importance on the “quality” of earnings, looking for recurring revenue streams, strong cash flows, and solid operating margins. At one time, the managers of the fund’s U.S. portion used a different approach, but in mid-2013 the U.S. manager was incorporated into what had been the international team (which Invesco calls EQV, for earnings, quality, and valuation), so now the entire fund uses the EQV strategy. The valuation portion plays a significant role, leading this portfolio to be more moderate on the growth spectrum than most rivals in the new world large-growth category.

Before the U.S.-focused manager joined the EQV team, the fund heavily underweighted the U.S. side of the portfolio. That portion gradually increased; by March 31, 2021, it stood at 56%, close to the level of the MSCI ACWI Growth. The managers say they probably won’t allow such a large gap to recur, so that stock choices drive performance. Meanwhile, the fund’s small-cap weight rose after it absorbed a small-mid sibling in 2020. It now has a market cap around one third that of the index.

The Fund’s Portfolio

Matt Dennis and his comanagers took advantage of the early-2020 bear market to make many changes. Dennis and Ryan Amerman, who focuses on the U.S. side of this offering, say they added 19 new stocks to the portfolio in 2020’s first quarter, while selling 11. That’s a much higher level of activity than usual for this fund, as the managers prefer to hold on to stocks for longer periods of time, and since then activity has slowed down. Compared with its MSCI ACWI Growth benchmark, the fund has some noteworthy distinctions. Not surprisingly, given this fund’s moderate take on growth and attention to valuations, the tech-sector stake of 21% is about 10 percentage points lower than the indexes. But the managers do like a number of tech names, such as JD.com, which they say has become preferable to Alibaba BABA (though they still own the latter) because they see a greater potential for margin expansion, and Dropbox DBX, which they also added last year. Conversely, the fund’s stake in financial services is twice the index’s level, even though they are wary of big U.S. and European banks. Rather, they own investment-focused stocks such as LPL Financial LPLA in the U.S. and Fineco in Italy, along with payment-focused firms such as Visa V and PayPal PYPL. The managers say the portfolio’s substantial U.K. overweighting owes not to macro factors but to the appeal of a number of specific stocks.

The Fund’s Performance

This fund now lands in the new world large growth category. Because growth has outperformed value and core over most of the 10 years since Matt Dennis was named sole lead manager (until the past six months saw a reversal of that trend), and this fund is more moderate than most of its new peers, it has been at a disadvantage. Over the trailing 10-year period ended April 30, 2021, the 9.1% annualized return of its A shares lagged the world-large-growth category average by 2 percentage points and the MSCI ACWI Growth by 2.8 percentage points. It’s worth noting, however, that it essentially matched the return of the core MSCI ACWI over that time period, and beat the average of the new world-large-blend category by 0.8 points. (The fund’s portfolio currently lands barely on the growth side of the growth/blend border of the style box.) One hindrance has been the fund’s so-so performance in major downturns. It didn’t stand out in 2015’s third quarter, and its 13.5% loss in 2018 was more than 5 percentage points worse than the growth index and new growth category, From Jan. 21 through March 23, 2020 (the peak and trough of foreign indexes in that bear market), its return was again similar to the MSCI ACWI and the category norm.

Source: Morningstar

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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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Lazard International Strategic Equity

Lead manager Mark Little, based in London, joined Lazard in 1997 and has run this fund since its October 2005 inception. The other three managers have all served this strategy since at least 2009, meaning the group has worked together extensively. Lazard’s large and experienced international and emerging-markets equity teams provide the managers with excellent support.

The team’s all-cap relative-value strategy allows the managers to pursue opportunities wherever they see fit. Ideas sometimes come from quantitative screens, though the managers and analysts often uncover ideas themselves through their own research. Two of the four comanagers have accounting backgrounds, allowing the team to conduct thorough analysis on the attractiveness of a company based on their preferences. They search for companies with an alluring combination of valuation and profitability, though the portfolio’s profitability metrics fell in line with those of the MSCI EAFE benchmark as of March 2021.

As with many all-cap mandates, the resulting portfolio’s characteristics vary, and the managers have navigated well without becoming too dependent on any type of stock. The portfolio’s average market cap nearly tripled to $30.8 billion from $11.8 billion since 2013 as small- and midcap opportunities faded and large-cap stocks surged (though that tally is still lower than its median peer and benchmark). The managers aren’t afraid of making bets on specific countries either: The March 2021 portfolio had an 8% allocation to each of Canada and Ireland, while the benchmark had less than 1%

The Fund’s Approach

A flexible and well-executed approach earns this strategy an Above Average Process rating. Like other Lazard strategies, this one uses a malleable relative-value strategy that ranges across the market-cap spectrum. The team searches for companies with an attractive combination of valuation and profitability, a balance that landed the March 2021 portfolio squarely in the large-blend section of the Morningstar Style Box. However, the strategy’s flexibility also allows the portfolio’s style to drift to where the managers see opportunity, and it sat in the large-growth category for several years prior to 2019.

Quantitative screens sometimes produce ideas, though the managers and Lazard’s deep analyst bench often find ideas through their own research. Two of the four comanagers have accounting backgrounds, allowing the team to conduct nuanced analysis on the attractiveness of a company to see if it aligns with their preferences. The management team works with the analysts on top-down analysis (like economic and political situations) to supplement its fundamental research as well. If the managers decide to invest, they usually replace an existing holding, resulting in a portfolio that consistently holds between 65 and 75 stocks.

The Fund’s Portfolio

While the portfolio invested 40% of its assets in mid-cap stocks in 2013, manager Michael Bennett notes that appealing small- and mid-cap stocks have been more difficult to find in recent years. As a result, the portfolio’s stake in mid-caps had fallen to 12% by March 2021 while positions in large- and giant-cap companies rose. The portfolio’s average market cap tripled to $35 billion from $11.8 billion over that time, though it’s still lower than its median foreign large-blend peer and MSCI EAFE benchmark. Despite the managers’ emphases on financial health and valuation, the portfolio’s profitability metrics fall in line with those of the benchmark and median peer while price metrics are marginally higher.

The portfolio’s style has drifted toward the large-blend category from large growth in recent years, though risk factor exposures have always tended to align closely with the core-oriented benchmark. The managers want stock selection to drive returns, but meaningful sector bets are common, such as the 5-percentage-point underweighting in tech and a similar-size overweighting in industrials in the March 2021 portfolio. Investors here should also expect meaningful country bets, such as the 13-percentage-point underweighting in Japanese stocks in March and 8-percentagepoint over-weightings to Canadian and Irish stocks that month.

The Fund’s Performance

This strategy performed poorly in early 2020’s pandemic-related sell-off. It lost 35.5% from Jan. 22 through March 23, worse than the MSCI EAFE benchmark’s 33.7% decline. Investments in several out-of-benchmark Canadian companies dragged on returns, such as National Bank of Canada and Suncor Energy, which respectively suffered as both interest rates and oil prices plummeted. The strategy’s positions in several air-travel stocks also hurt, such as Air France, Airbus, and Canadian manufacturer CAE Inc. CAE.

Over longer periods, however, performance has been more impressive. From its October 2005 inception through April 2021, the strategy’s institutional shares’ 7.1% annualized return outpaced its foreign large-blend Morningstar Category’s 5.0% and benchmark’s 5.2%. Furthermore, it outperformed without excess volatility, resulting in superior risk-adjusted metrics (such as the Sharpe ratio) over that time frame. The strategy typically wins by shielding capital in sell-offs, capturing only 92% of the index’s drawdowns since inception. It performed well in 2018, a challenging year for international equities, and during the 2007-09 global financial crisis, though as noted it failed to provide a meaningful cushion in early 2020. While it can outperform in bull markets, such as that of 2012-13, its performance in rallies tends to be middling.

Source: Morningstar

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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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Daily Report Financial Markets

US Market Outlook – 28 May 2021

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Global stocks Shares

Best Buy Co Inc

Revenue was $11.6 billion, up from $8.6 billion in 2021’s first quarter and ahead of our $10.4 billion forecast. Comparable sales were up 37.2%, bolstered by the domestic appliance segment (comps up 67%), which the firm attributed to economic stimulus and sustained spending on the home. Best Buy’s 6.6% operating margin was ahead of the 2.7% result in fiscal 2021 and our 3% projection and reflected an improvement over 2020’s first-quarter result of 3.7%. Fiscal 2022 first-quarter EPS came in at $2.32, well above our $0.90 estimate. For comparison, first-quarter 2020 EPS was $0.98.

While these results were impressive, we are skeptical about their sustainability as economic stimulus payments are set to end and other disposable income options are increasing. Management’s second-quarter guidance indicates a deceleration of comps (17%) and a flat gross margin compared with 2021 (22.9%). For the full year, we expect comps around 5% (in line with updated guidance of 3%-6%), flat year-over-year gross margins, and a slight increase in selling, general, and administrative expense. We don’t plan a material change to our $101 fair value estimate and view the shares as overvalued, given the headwinds Best Buy faces.

One notable takeaway in Best Buy’s favor was the efficacy of its e-commerce and omni channel strategy despite the reopening of physical stores. Sixty percent of online orders were fulfilled from a Best Buy store via shipping, delivery, or pickup in store. Additionally, online orders made up 33% of domestic sales, compared with 15% in 2020. The firm is planning to capitalize on this with its new Best Buy Beta loyalty program, which offers perks including same-day delivery and special member pricing. For Best Buy to remain competitive after COVID-19, an evolving e-commerce plan is imperative.

Profile

Best Buy is one of the largest consumer electronics retailers in the U.S., with product and service sales representing more than 9% of the $450 billion-plus in personal consumer electronics and appliances expenditures in 2019 (based on estimates from the U.S. Bureau of Economic Analysis). The company is focused on accelerating online sales growth, improving its multichannel customer experience, developing new in-store and in-home service offerings, optimizing its U.S., Canada, and Mexico retail store square footage, lowering cost of goods sold expenses through supply-chain efficiencies, and reducing selling, general, and administrative costs.

Source:Morningstar

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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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Global stocks

Burlington Stores Inc

As economic stimulus was likely the primary contributor to Burlington’s 20% comparable growth relative to prepandemic first-quarter fiscal 2019 levels, we still call for normalized mid-single-digit revenue growth and low double-digit adjusted operating margins long term. We have a favorable view of the chain’s improvement initiatives but believe the shares’ trading price assumes a best-case scenario.

Burlington’s $2.2 billion in first-quarter sales sailed past our $1.6 billion estimate (which was in line with the chain’s fiscal 2019 performance; we had been more cautious about the cadence of the pandemic-related recovery). Cost leverage led to a 10.8% adjusted EBIT margin, up nearly 370 basis points from the same period in fiscal 2019. Management did not offer guidance, but indicated it plans full-year sales to be around 20% higher than fiscal 2019’s $7.3 billion, and our prior $8.0 billion target should rise toward $8.7 billion, accelerating a recovery we had expected to extend into fiscal 2022. Leadership models a full-year adjusted EBIT margin decline of 20-30 basis points from fiscal 2019’s 9.2%, and our prior 8.7% mark should rise accordingly.

Although we caution against reading too much into a quarter borne of exceptional circumstances (easy comparisons due to 2020 store closures, stimulus, and pent-up demand), we believe the performance highlights Burlington’s greater agility as it executes management’s plans for more opportunistic inventory purchases. The chain was not spared the effects of global freight supply challenges, but we believe its work to use its reserve inventory and large roster of vendors protected its ability to flow product. We do not anticipate the freight issues will linger, with normalization as supply and demand dynamics stabilize alongside the economy.

Profile

The third-largest American off-price apparel and home fashion retail firm, with 761 stores as of the end of fiscal 2020, Burlington Stores offers an assortment of products from over 5,000 brands through an everyday low price approach that undercuts conventional retailers’ regular prices by up to 60%. The company focuses on providing a treasure hunt experience, with a quickly changing array of merchandise in a relatively low-frills shopping environment. In fiscal 2020, 21% of sales came from women’s ready-to-wear apparel, 21% from accessories and footwear, 19% from menswear, 19% from home décor, 15% from youth apparel and baby, and 5% from coats. All sales come from the United States.

Source:Morningstar

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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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Global stocks Shares

Dollar Tree Inc

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Our planned change is primarily a result of a higher ongoing tax rate assumption (26% statutory rate from 2022 onward, from 21% prior), as a time value of money-related adjustment mostly offsets the impact of a softer near-term outlook amid heightened freight costs. Our long-term targets still call for mid-single-digit annual top line growth and high-single-digit adjusted operating margins. We do not see a buying opportunity at the shares’ current trading price, despite a mid-single-digit percentage pullback after the announcement.

Quarterly comparable sales rose 4.7% at the Dollar Tree banner (with about a 100-basis-point impact from adverse weather in February) and fell 2.8% at Family Dollar (after a 15.5% increase in the same period of fiscal 2020 as consumers stocked up in the early days of the pandemic). We had expected a 5.5% increase and a 4% decline, respectively. Management set full-year guidance of $5.80- $6.05 in adjusted diluted EPS, including a $0.70-$0.80 freight cost headwind on a per share basis. Our prior $6.28 mark (excluding forecast share buybacks) will likely fall toward the new range, considering Dollar Tree’s heightened dependence on spot freight markets in light of capacity constraints.

Management still expects Dollar Tree Plus (a format that includes a section with certain discretionary items that cost more than the traditional $1 Dollar Tree limit) and its combo stores (which combine elements from the Family Dollar and Dollar Tree assortments in rural areas) to drive growth long term. We view the concepts favorably and think they should allow the company to leverage the strengths of each banner and its purchasing power. Still, we do not anticipate the benefits will include the development of an economic moat, considering the intense competitive environment

Profile

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1 price (CAD 1.25 in Canada). Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

Source:Morningstar

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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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Global stocks

Vertex’s Narrow Moat Underpinned by Intangible Assets from Cystic Fibrosis Drugs; Shares Undervalued

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The company’s approved cystic fibrosis drugs are Kalydeco, Orkambi, Symdeko, and Trikafta, which will make Vertex eligible to treat about 90% of the CF population, assuming international and pediatric approvals. We expect Vertex to maintain its dominant position in CF, given the strong efficacy of its therapies, lengthy patents, and lack of competition, while developing pipeline candidates in other rare indications to spur growth.

Cystic fibrosis is a rare indication characterized by a progressive and deadly decline in lung function, affecting approximately 83,000 people worldwide. Since its 2012 launch, Kalydeco has captured most of its target patient population (less than 10% of CF patients with specific genetic mutations) and has become the backbone of combination therapies, including Orkambi, Symdeko, and Trikafta. Orkambi’s launch in 2015 expanded the eligible patient population by adding CF patients with homozygous F508del mutations, but its uptake was slower because of its safety profile. Symdeko’s 2018 launch didn’t come with any worries over safety and contributed over $700 million in revenue in its first year, targeting the same population as Orkambi plus some. Trikafta, a triple combination therapy, had a strong launch since its U.S. approval in 2019, significantly expanding the company’s addressable patient population to heterozygous patients.

Vertex’s comprehensive approach has already shaped the treatment of CF and earned it a dominant position worldwide. The chronic nature of therapy and limited competition on the horizon heighten the CF market’s attractiveness. Given these positive market dynamics, we think Vertex’s CF program could grow to over $11 billion within our forecast period. Vertex’s pipeline spans several rare diseases, including CTX001 for beta-thalassemia and sickle-cell disease, VX-864 for alpha-1 antitrypsin deficiency, and VX-147 for APOL1-mediated kidney disease. We think the CF franchise will provide ample cash for the development of these assets and others.

Fair Value and Profit Enhancers

We are maintaining our fair value estimate of $259 per share. Our valuation remains heavily dependent on the cystic fibrosis portfolio, including its latest drug, Trikafta. This new triple combination drug is poised to continue generating solid sales throughout our explicit forecast period. We model about $7 billion in cystic fibrosis sales in 2021, driven by Trikafta (in both F508del homozygous and heterozygous patients). Vertex’s complete portfolio of cystic fibrosis therapies allows it to target about 90% of cystic fibrosis patients globally, assuming international and pediatric approvals.

While we give the company’s pipeline candidates fairly low probabilities of approval due to their early stages in development, Vertex is targeting several blockbuster opportunities, which amount to over $1 billion in 2026 pipeline sales. Key opportunities include CTX001 (gene editing) for beta-thalassemia and sickle-cell disease as well as VX-864 for alpha-1 antitrypsin deficiency. Vertex is leading the global development and commercialization efforts of CTX001 in a 60/40 agreement with CRISPR Therapeutics. We believe the potential commercial success of this therapy will be a key indicator of the company’s ability to diversify, as management targets regulatory submissions within the next 18-24 months. We also expect the company to continue funding research in cystic fibrosis to develop next-generation therapies for CF, including small-molecule correctors and gene-editing technology.

Vertex’s Narrow Moat Underpinned by Intangible Assets From Cystic Fibrosis Drugs

Vertex has continued to be a leader in the treatment of cystic fibrosis worldwide. Its four approved drugs–Kalydeco, Orkambi, Symdeko, and Trikafta–are the only disease modifying CF drugs on the market. The company also holds significant patient share as nearly 50% of patients worldwide are currently treated for CF using its drugs. Vertex’s portfolio makes up the backbone of cystic fibrosis therapy and supports strong six-figure pricing power. After taking a fresh look at the company, we maintain our $259 fair value estimate and narrow moat rating. We view the shares as undervalued, trading in 4-star territory. Vertex is well supported by lengthy patent protection extending as far as 2037 and first-mover status in the lucrative cystic fibrosis market, which underpins our narrow moat rating. Our valuation remains heavily dependent on the cystic fibrosis portfolio, including the latest drug, Trikafta. This new triple combination drug is poised to continue generating significant sales throughout our explicit forecast period. Trikafta will make the company eligible to treat about 90% of the CF population globally, assuming international and pediatric approvals. We model about $7 billion in cystic fibrosis sales in 2021, largely driven by Trikafta.

Vertex Pharmaceuticals Inc’s Company Profile

Vertex Pharmaceuticals is a global biotechnology company that discovers and develops small-molecule drugs for the treatment of serious diseases. Its key drugs are Kalydeco, Orkambi, Symdeko, and Trikafta for cystic fibrosis, where Vertex therapies remain the standard of care globally. In addition to its focus on cystic fibrosis, Vertex’s pipeline includes gene-editing therapies such as CTX001 for beta-thalassemia and sickle-cell disease as well as small-molecule medicines targeting diseases associated with alpha-1 antitrypsin deficiency and APOL1-mediated kidney disease. Vertex also has an expanding research pipeline focused on inflammatory diseases, non-opioid treatments for pain, and genetic and cell therapies for type 1 diabetes and rare diseases.

Source: Morningstar

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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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Avantis® U.S. Equity Institutional

The fund offers broad exposure to stocks of all sizes listed in the U.S. and tilts toward those with lower price/book multiples and higher profitability. To accomplish this, the managers assign weights based on a stock’s market cap and a market-cap multiplier. They apply larger multipliers to stocks with lower valuations and higher profitability, while those with opposite characteristics receive smaller multipliers. This technique has two advantages. It effectively leans toward factors that have historically been associated with superior long-term returns, which should give the fund an edge when those styles are in favour. It also cuts back on turnover and trading costs because a stock’s market cap is incorporated into the weighting scheme. Overall, this is one of the best diversified and lowest turnover funds in the large-blend Morningstar Category.

The portfolio’s emphasis on stocks with lower valuations has been persistent. But its preference for profitable firms was less obvious because cheaper stocks tend to be less profitable than their larger and faster-growing counterparts. However, the fund’s profitability tilt is still at work, even if its holdings, on average, generate lower returns on invested capital than the market. Incorporating profitability paints a more complete picture about each stock’s expected return and should steer the portfolio away from lower-quality names. Leaning toward stocks trading at lower valuations has paid off over this fund’s short live track record. It modestly outperformed the Russell 1000 Index, beating the bogy by 1.1 percentage points per year from its launch in December 2019 through April 2021. The fund’s 0.15% expense ratio lands within the cheapest decile of the category and should provide a long-term edge over many of its peers.

The Fund’s Approach

The fund’s managers start with a broad universe that includes U.S. stocks of all sizes. They use market-cap multipliers to emphasize those trading at low price/book ratios (adjusted to remove goodwill) and high profitability (using a cash-based measure of operating income that removes accruals). Names with lower price/book ratios and higher profitability receive larger multipliers than those with opposite characteristics. This effectively tilts the portfolio toward profitable names trading at lower valuations without incurring a lot of turnovers because each stock’s weight remains linked to its market cap, so weights will change proportionally with price changes.

The strategy takes measures to reducing trading costs. Some turnover is required when a stock’s book value or profitability changes, but the mangers will allow stocks to float within predetermined tolerances to avoid unnecessary trading. Traders can help further cut back on transaction costs.

The Fund’s Portfolio

The strategy’s broad reach and emphasis on stocks trading at lower multiples pushes it away from the largest and most expensive names in the market and improves diversification relative to the Russell 1000 Index. Its average market capitalization has been less than half that of the index. As of April 30, 2021, the fund’s 10 largest names represented 16% of assets, while the same ten firms represented about one fourth of the Russell 1000 Index.

Including small caps expands the fund’s reach and makes it one of the broadest in the large-blend category. It holds more than twice the number of stocks in the Russell 1000 Index. The benchmark does not include small-cap companies, which represent about 15% of this fund. The fund’s emphasis on stocks with low price/book ratios has been evident. Its average price/book ratio has consistently landed below that of the Russell 1000 Index, though it still lands in the large-blend segment of the Morningstar Style Box. Its value orientation also steers it toward cyclical sectors. The fund has larger stakes in the consumer cyclical and financial-services sectors, with comparably smaller positions in names from the technology and communications sectors. The portfolio’s average return on invested capital has also been lower than the index because companies trading at lower multiplies tend to be smaller and less profitable, on average.

The Fund’s Performance

This fund has a short live track record, but it managed to outperform the Russell 1000 Index by 1.1 percentage points from its launch in December 2019 through April 2021. On balance, its value orientation contributed to that mild advantage. Overweighting stocks trading at lower multiples hurt performance during the coronavirus sell-off in the first quarter of 2020, when it lagged the Russell 1000 Index by 3.7 percentage points. But value stocks aided performance during the ensuing rebound. The fund outperformed the index by 7.2 percentage points between October 2020 and April 2021. So far, this strategy has been more volatile than the Russell 1000 Index. Its standard deviation since its December 2019 inception has been about 6% higher than the benchmark, so it slightly underperformed the index on a risk-adjusted basis.

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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Fixed Income Fixed Income

DWS Global High-Income Inst

Gary Russell has led this strategy since August 2006 and previously ran DWS’ high-yield team in Europe. Thomas Bouchard and Lonnie Fox have comanaged the strategy since 2016 and 2018, respectively, after joining as credit analysts in 2006 and 2008. The trio is supported by European counterpart Per Wehrmann and 14 analysts split between the United States and Europe. The support team is sizable, but with 19 departures since 2016, turnover has been an issue.

The managers leverage the firm’s macro-outlook to shape risk budgeting and industry allocation. Analysts assign a recovery value and probability of default to each bond and loan and look at standard fundamental metrics to assess attractiveness relative to the constituents of the strategy’s BofAML Non-Financial Developed Markets High Yield Index benchmark. High-conviction names are typically sized up to 3%, while names perceived as riskier are scaled down accordingly.

The strategy’s higher-quality and global approach sets it apart from peers. The allocation to riskier bonds rated CCC and below stood at 5% as of March 31, 2021, well under the high-yield bond Morningstar Category’s 13% median. The managers pursue opportunities across the globe, and while allocation to the U.S. represents the bulk of assets (60% as of March 31), the portfolio includes sizable exposures to Europe (19%) and Canada (7%). Low-single-digit stakes in emerging markets round out the portfolio.

Over Russell’s tenure from Aug. 1, 2006, through April 31, 2021, the 6.5% annualized gain of the strategy’s institutional share class slightly edged out the category median (comparing distinct funds) peer, landing it in the top half of the category, while the strategy’s volatility-adjusted performance beat over two thirds of rivals.

The Bond Fund’s Approach

The strategy’s disciplined and conservative credit-driven process has demonstrated its value through time, but the analyst churn casts a shadow on its execution and puts a lid on our confidence level, supporting an Average Process Pillar rating. The team takes a conservative and straightforward approach to credit investing. Lead manager Gary Russell and six other high-yield managers focus on portfolio construction, translating the firm’s macro view into investment decisions. Analysts assign each company a recovery value and probability of default, which helps the managers appropriately size positions. All positions are typically capped at 3% and riskier names are scaled down, resulting in a portfolio that usually counts over 350 holdings, ensuring proper diversification, especially on the portfolio’s riskier sleeves.

The strategy’s global mandate has historically resulted in about 60% of assets invested in U.S. high-yield bonds, with most of the balance split between Canadian and European issues, but non-U.S. currency exposure is hedged back to the U.S. dollar. In terms of credit profile, the portfolio tends to skew higher-quality than its high-yield bond category peers, with a relatively large BB stake and limited allocations to issues rated CCC or below.

The Bond Fund’s Portfolio

The team has expressed its conservatism by favouring higher-quality segments of the high-yield market. For example, issues rated BB represented 57% of this strategy’s portfolio as of March 31, 2021, versus 41% for its typical high-yield bond category peer. On the other hand, issues rated CCC and below totalled just 5% of assets or 8 percentage points less than the strategy’s typical peer. The strategy uses its global team to offer a distinct geographic footprint that separates it from many of its peers. Indeed, its non-U.S. exposure stood at 30% as of March 2021, or almost 3 times its typical peer’s. Developed European corporates accounted for 19% of assets and Canadian positions for 7%. Smaller allocations to Asia, Latin America, Africa, and the Middle East stood in the low single digits.

The strategy has had a sluggish start to 2021 owing to its higher-quality tilt and minimal use of bank loans. Rising rates for much of 2021 has prompted many peers to favour higher-yielding and lower-quality assets and bank loans to offset this. As of March 2021, the 41% in B and below was on the aggressive end for this strategy, but its typical peer had over 50% here, including 13% in CCC and below. At the same time, the strategy held less than 1% in bank loans, while a fifth of its peers held about 10% here.

The Bond Fund’s Performance

| Owing to its conservative credit profile and good security selection, this strategy has produced solid returns under lead manager Gary Russell’s watch. Since Russell took over in August 2006 through April 2021, its institutional shares returned 6.5% annualized, landing it in the top half of its high-yield bond category peers. Impressively, the team was able to keep volatility at bay for most of this period, and the strategy’s volatility-adjusted performance–as measured by Sharpe ratio–beat 66% of rivals. During the energy-led credit sell-off from June 2015 to February 2016, a lower exposure to bonds rated CCC or below helped the strategy hold up better than most rivals. Over the period, its 5.9% loss outperformed the category median by 2.3 percentage points, landing ahead of 70% of its distinct peers.

Source: Morningstar

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