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. These are the winners of 2023.
Best Europe Equity Fund
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.
Winning this award, Richard Halle, fund manager of the M&G (Lux) European Strategic Value Fund, said: “The root of our success was we performed well during the years when value was out of favour. This gave us the confidence to stick to our principles and stay true to value so that when it came back into favour the fund was well positioned for this. Despite a weak overall market, the fund was able to deliver a positive return. This was thanks to our stock selection, sector positioning, and overall portfolio construction. Our investment anchored in tangible valuation has provided a natural hedge against a falling market where expensively valued names had given back the high valuations gained in previous years.”
Best Global Equity Fund
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.
Best EUR Bond Fund
Candriam Bds Euro High Yld R EUR Cap
Morningstar Analyst Rating: Silver
People Pillar Score: High
Process Pillar Score: Above Average
Candriam Bonds Euro High Yield stands apart from the competition thanks to its stable and tight-knit investment team following a risk-aware, research-driven investment process. Nicolas Jullien took the helm at this fund, and leadership of Candriam’s global high-yield team, in January 2020. He was stepping into the shoes of previous high-yield chief Philippe Noyard, who was promoted to Candriam’s head of global credit. However, a number of factors made the transition less disruptive than it might have seemed.
For one, Jullien had worked alongside industry veteran Noyard in managing this strategy for the prior 13 years, during which time the two managers consistently plied a risk-aware and thoughtful process and built a compelling track record. For another, while Jullien is now responsible for the day-to-day decision-making in this portfolio, Noyard remains integral to the security selection process through his role chairing the group’s credit committee, where any issuers that enter the portfolio are vetted extensively by the high-yield team’s managers and credit analysts. Jullien is further supported by comanager Thomas Joret, who focuses primarily on the group’s global high-yield mandates, and an experienced team of six global high-yield analysts.
Jullien has not altered the investment process here, which relies mainly on security selection backed by deep fundamental analysis combined with relative value considerations. The manager also uses derivatives in moderation to adjust the portfolio’s overall credit market sensitivity or to gain exposure to certain highly traded issuers at a lower cost. Unlike many competitors in the euro high-yield bond Morningstar Category, the strategy treads lightly within the financial sector, which the managers argue carries policy risks inappropriate for a high-yield portfolio. That restrained opportunity set has not held the strategy back from beating its more broadly invested peer group.
Best EUR Allocation Fund
Cartesio Equity R
Morningstar Analyst Rating: Bronze
People Pillar Score: Above Average
Process Pillar Score: Above Average
We hold the managers and firm founders Juan Bertrán, Alvaro Martinez, and Cayetano Cornet in high regard. This dedicated trio has been investing together since 2004 and has closely aligned their interests with those of investors. We also appreciate the managers’ independent, contrarian mindset, and strong belief in their investment process. To support their research effort, in 2015-17 they built up a team of four analysts. Ignacio Sanz and Ignacio Carvajal became portfolio managers and partners in 2019 with a small ownership stake. Unfortunately, there has been some turnover among more junior staff and the investment team now totals six.
The team has a vast universe to cover as it invests in European firms of all sizes—and opportunistically in other regions. The managers rely to some extent on sell-side research, but this fund’s patient, value-oriented, and established process helps narrow the opportunity set. There are two sources of alpha here: asset allocation between stocks and cash (0-100%) and stock selection. The managers calibrate the strategy’s equity/cash mix based on their investment outlook and bottom-up assessment of the opportunity set. They typically respond gradually and countercyclically to major market moves or dislocations, preferring to keep cash for safety and optionality when prevailing valuations are high and opportunities are scarce. As for stock selection, the managers invest in 30-40 names with a long-term horizon. Companies are individually selected based on their fundamental merit but with a strong focus on valuations. This established, long-term-oriented process has been executed consistently since the strategy’s launch in 2004.