By Jeffrey Schumacher
The Morningstar Awards for Investing Excellence are handed out to those mutual funds that have not only distinguished themselves on the basis of their outstanding historical risk-adjusted returns, but which, in the opinion of Morningstar's fund analysts, also differentiate themselves from the competition. We expect that their outstanding management team and a proven investment process give these strategies the ability to continue to deliver superior returns versus their category benchmark in the future. The Morningstar Awards for Investing Excellence are thus primarily qualitative and forward-looking, with the analysis leading to the Morningstar Analyst Rating playing a crucial role. This makes the Morningstar Awards for Investing Excellence unique of their kind.
The Morningstar Awards for Investing Excellence category awards are handed out in four disciplines: Best Europe Equity Fund, Best Global Equity Fund, Best Euro Bond Fund and Best Euro Allocation Fund.
The qualitative Morningstar Analyst Rating assigned by fund analysts plays a central role in the selection process for the Morningstar Awards for Investing Excellence. To qualify as a candidate for an award, a fund must be rated in one of the Morningstar categories eligible for the respective category award. To qualify for the longlist, the fund must have a Morningstar Analyst Rating of Gold, Silver or Bronze for the relevant fund class accessible to retail investors in Luxembourg. A shortlist is then compiled based on historical risk-adjusted performance, with a focus on performance in 2022, combined with nominations from fund analysts. After debating the shortlisted candidates, fund analysts cast their votes to determine the final ranking. The winner is determined by majority vote.
Europe Equity
These are the three nominees for the Morningstar Awards for Investing Excellence in the Europe Equities category (in alphabetical order):
BGF European Value
Morningstar Analyst Rating: Bronze
People Pillar Score: Above Average
Process Pillar Score: Above Average
The strategy continues to benefit from the expertise of longstanding lead manager Brian Hall, who managed the fund since 2010. Personnel turnover and reshuffling of responsibilities after reorganising BlackRock’s European equity team in 2019 offered opportunities for emerging talent to make their mark, for example for Peter Hopkins. He joined the team in 2015 as an analyst and took on portfolio manager responsibilities in 2021 when he joined Hall on this strategy. Next to successfully developing internal talent, the team was also reinforced by hiring several experienced sector specialists as analysts and by adding members with specialised skills in shorting and data analysis, broadening the team’s analytical capabilities. This has increased resources from 19 to 23 over the past three years, making it one of the best-resourced European equity teams. Another factor that boosted our confidence are signs of increased collaboration within the team, as evidenced by several high-conviction positions commonly held across portfolios, which also somewhat alleviates our workload concerns. After a rather turbulent period, BlackRock’s European equity team is back to a more competitive shape, justifying an Above Average People score.
Hall’s pragmatism of his definition of value, the process’ structure and disciplined execution, and the breadth and depth of the broader team’s research backing stock selection warrant an Above Average Process Pillar rating. He and Hopkins classify stocks across three groups: stable value, cyclical value, and turnaround situations. Bottom-up stock analysis is the key driver of security selection, but some macro inputs are also considered when conducting fundamental research. Their pragmatic approach to value investing is exemplified in the portfolio's style, with the strategy typically hovering between the value and core columns of the Morningstar style box.
The strategy outperformed 77% of the Europe Large-Cap category peers in 2022, while ranking close to the top-decile in their peer group over longer time periods. An impressive track record driven by effective stock selection.
M&G (Lux) European Strategic Value
Morningstar Analyst Rating: Bronze
People Pillar Score: Above Average
Process Pillar Score: Above Average
M&G (Lux) European Strategic Value benefits from a skilled manager who knows how to navigate the pitfalls of value investing, earning it an Above Average People score. Richard Halle has run this strategy since its inception in February 2008 initially under an OEIC format before it migrated to a Luxembourg-domiciled vehicle in 2018. He has spent most of his 20-year career at M&G. Halle leverages M&G’s central research team of nine. This team has been rebuilt and reinforced with experienced hires since 2014, though the fact that they support several other managers with different styles is not ideal.
The fund’s process further contributes to its appeal. The strategy is straightforward, disciplined and benefits from a sensible portfolio construction. The process begins with a quantitative screening that ranks all stocks by price/book ratio. This is simplistic and could quickly derail the fund, but adjustments are made to include research and development as well as off-balance-sheet items. Within each sector, only the cheapest quartile is considered for the next stage. The fundamental analysis aims to eliminate companies that are cheap for good reasons and unlikely to mean-revert. Financial strength, durability of business model, and management behaviour are scrutinized to avoid value traps.
This approach has been executed with consistency and good risk awareness, including in small- and mid-caps, which have taken a bigger share of the portfolio since 2015. From inception to the end of December 2022 but also in the trailing three-, five, and 10-year periods, the fund has generated significant alpha against the MSCI Europe Value Index through stock selection across a range of sectors.
Magallanes V.I. UCITS European
Morningstar Analyst Rating: Bronze
People Pillar Score: Above Average
Process Pillar Score: Above Average
Magallanes European Equity’s edge resides in his focused team, talented lead manager, and repeatable investment process. The fund is run by the firm’s founder and CIO, Iván Martín. The manager built a successful career running Iberian equity portfolios for around 15 years before setting up the investment boutique Magallanes in 2014. He has built a small team of three roving analysts and one trader who are closely supporting him in running the firm’s three strategies, where they apply the same value-centric investment philosophy. We think highly of the manager’s expertise, alongside the team’s cohesive, independent and research-heavy approach to value investing.
The team’s disciplined, thoughtful, repeatable investment approach earns the strategy an Above Average Process Pillar rating. Stock valuations are paramount here. Once team members identify an idea, they perform a thorough fundamental due diligence of a business to estimate its intrinsic value, relying more on normalized earnings potential rather than precise forecasts. The valuation approach varies depending on the company, following Peter Lynch’s classification: slow growers, stalwarts, fast growers, cyclicals, asset-backed, and turnarounds. Independent research is a key principle of the team’s investment philosophy, as individual stock selection is the primary driver of performance.
The team invests with a long-term mindset in Europe-domiciled firms across the market-cap spectrum. Portfolio changes are rare in this strategy. At times, the approach can result in meaningful, concentrated bets in selected areas. More than two thirds of the fund’s assets are invested in small and mid-caps, for example. The fund’s performance path hasn’t been an easy ride for investors, and the strategy’s risks have been in full display over the years. It delivered excellent returns in its first three years of history, then lagged its benchmark and peers in 2018-20, and finally came back strongly in 2021 and in 2022.
Global Equity
These are the three nominees for the Morningstar Awards for Investing Excellence in the Global Equity category (in alphabetical order):
GuardCap Global Equity
Morningstar Analyst Rating: Gold
People Pillar Score: High
Process Pillar Score: High
GuardCap Global Equity's talented and close-knit team combined with an impressive and rigorous bottom-up process give this fund a strong advantage.
The fund is led by Michael Boyd and Giles Warren, two experienced quality growth investors who have worked together for more than 20 years. They successfully managed Seilern World Growth, launched by Boyd in 1996. Since 2014, they have jointly been at the helm of GuardCap Global Equity, which is founded on the same approach. Together with Orlaith O'Connor and Bojana Bidovec, they form a compact and dedicated team that has developed deep knowledge of the companies they invest in as a result of strong focus and intensive collaboration.
One of the strategy's strengths is its rigorous, patient and well-structured process. The depth of research combined with the extensive exchange of knowledge between team members make this process an industry example. The philosophy rests on strict quality and growth criteria, but also has an eye for valuation. A very limited number of companies pass the quantitative screening, after which the team patiently and meticulously analyses the companies. The intensity of the screening increases as a company goes through the various stages of the process. The research is documented in detailed reports, which the team members discuss on an ongoing basis. All four managers have a voice in promoting a company to the next research phase.
Boyd and Warren ultimately select 20 to 25 stocks that reflect the managers' strongest beliefs. While the portfolio is clearly focused on high-quality growth stocks, it is also relatively diversified across sectors compared to category peers using a similar strategy. The strategy's track record is strong, helped by effective capital protection during down markets.
Robeco QI Emerging Conservative Equities
Morningstar Analyst Rating: Bronze
People Pillar Score: Above Average
Process Pillar Score: Above Average
Robeco's quant-based conservative equities range is managed by a stable and experienced six-member team led by Pim van Vliet. They are supported by a group of 14 quantitative researchers, led by David Blitz and Weili Zhou, and a similarly sized group of data scientists. This credentialed team is vital to the fund's success as it constantly refines the models used in the funds. It is also reassuring that Robeco's broader quantitative team has successfully groomed quantitative researchers in its talent pool, allowing them to add people with complementary skills to the teams.
The strategy's academic foundation, repeatability, discipline, and consistent execution give us confidence. The rules-based, systematic process is centered around a proprietary stock-selection model, which is itself built on empirical research demonstrating that investing in low-risk stocks leads to superior risk-adjusted returns. The strategy goes beyond traditional low-volatility investing, though, by combining value, quality, sentiment and momentum signals in order to enhance the overall risk/return profile. The group's continuous efforts in researching and developing new signals and systems has resulted in several incremental enhancements to the model over the years.
This defensive strategy has generally offered shelter during turbulent markets, while lagging the broader market during broad-based rallies. The strategy staged a strong comeback in 2021 and 2022, topping over 90% of category peers in both calendar years--and trouncing the MSCI Emerging Markets Index returns.
Schroder ISF Global Sustainable Growth
Morningstar Analyst Rating: Bronze
People Pillar Score: Above Average
Process Pillar Score: Above Average
This strategy is managed by comanagers Charles Somers and Scott MacLennan. MacLennan has replaced former comanager Katherine Davidson, who left the firm per July 2022. While we consider her departure a loss, we’re comfortable with MacLennan as the new comanager next to the highly regarded Somers. They reside in Schroders’ experienced six-strong Global and International Equity team and can leverage the firm’s wide analytical resources, giving the strategy an edge. Schroders’ broader global analyst team, which employs more than 100 analysts located in 11 countries around the world, provides considerable support for fundamental stock research. The managers efficiently leverage this comprehensive resource via a team of 10 sector specialists responsible for identifying the analysts’ best ideas. Another strength is the Sustainable Growth Investor Group, which is formed by the management duo, well-regarded portfolio manager Simon Webber from the Global and International Equity team, and several (senior) members of the firm’s sustainability teams.
The current approach has been implemented since November 2017. The well-established and structured process aims to identify companies managing the business for the long term and recognising their responsibilities to a broad group of stakeholders. While they typically focus on identifying well-entrenched companies with underappreciated growth prospects, they also consider shorter-term opportunistic plays, which can be in more cyclical businesses. Each idea put forward by the sector specialists is scrutinised by the Sustainable Growth Investor Group on ESG grounds before it can be approved to a watchlist from which the comanagers are eligible to make their stock selections. This process is well-established, and we appreciate the process’ multilayered structure.
The current approach’s record remains on the short side given its inception in November 2017, but it has been impressive so far. The strategy’s solid valuation discipline and the leeway to invest in more cyclical growth can make the portfolio distinctively less growthy than many of the high-growth-focused peers in the global large-cap growth category. This has helped the fund perform well in 2022, as high-growth stocks sold off.
Winners announcement
The winners of the Morningstar Awards for Investing Excellence will be announced at a live event on Wednesday 8 March. To register for this event, please register here.
