Morningstar Magazine - June/July 2017 - 94

Investors

Undiscovered Managers Revealed
We look back over 10 years of profiles
and evaluate our picks.

UNDISCOVERED MANAGER

Laura Lallos

Over the past decade, Morningstar magazine has
profiled 82 funds run by 76 managers or
management teams under the Undiscovered
Manager banner. This includes new or under-theradar funds and managers, occasionally
better-known but uniquely compelling strategies,
or simply interesting approaches.
For our 10-year anniversary issue, we took a step
back and evaluated those picks. The managers and
strategies all made for good stories, worth
telling at the time. But what happened next?
We started off with a bang-and a bust.
In our first issue, Spring 2007, we showcased Scott
Brayman of Champlain Small Company CIPSX.
Ten years later, the fund has one of the best track
records in the small-cap growth category, has
earned a Silver rating from Morningstar's analysts,
and was recently a nominee for Morningstar
Domestic-Stock Fund Manager of the Year 2016.
Unfortunately, that issue also included Schneider
Value SCMLX. That fund was a strong performer for
a while, but its concentrated approach eventually
sank it. It was liquidated in 2016.
Lost to the Record
Four other funds we featured were eventually
liquidated-but only two of them count as blots
on our record. Those are Aston/River Road
Independent Value ARIVX, featured in 2013, and
Stewart Capital Mid Cap SCMFX, from 2014.
Both funds went on to achieve lackluster records
before being liquidated in 2016.

94

Morningstar June/July 2017

In contrast, Presidio PRSDX, showcased in 2008,
had a 5-star rating when it was liquidated in
2010. Manager Kevin O'Boyle (who'd also
successfully run Meridian Contrarian MVALX from
1995 -2003, when it was called Value) told
Morningstar at the time that he'd "lost the passion
and commitment that is required to sustain the
performance of a 5-star fund." He remains a
private investor today, though he stepped in as an
interim director of research at Aster Investment
Management to oversee the Meridian funds upon
the death of firm founder Rick Aster in 2012.
Van Kampen Pace ACPAX, highlighted in our third
issue, was chosen for manager Dennis Lynch.
That fund was liquidated after a merger with
Invesco, but it was no longer under the direction of
Lynch, who remained at original advisor Morgan
Stanley. He and his team went on to be named
Domestic-Stock Fund Manager of the Year in 2013
for their work on four funds: Morgan Stanley Focus
Growth AMOAX, Morgan Stanley Institutional
Growth MSEQX, Morgan Stanley Institutional Mid
Cap Growth MPEGX, and Morgan Stanley
Institutional Small Company Growth MSSGX.
Grading the Survivors
Being profiled in this feature does not automatically
equal a recommendation. It does not carry
the weight of a Morningstar Analyst Rating, which
is granted after an extensive evaluation process
by our research analysts. (We single out
some of those rated Morningstar Medalists in our
Best Ideas features every issue.) The funds
we profile haven't yet been through that vetting
process. Today, many of them come from
the Morningstar Prospects list, introduced in 2014,
which showcases picks that our analysts deem
promising, but that haven't graduated to full
analyst coverage.

Still, when we profile a fund it is because
we consider it worth watching, so we wanted to
assess our work. There isn't any one perfect
measure or time period to apply to a diverse group
of funds chosen across a span of 10 years. We took
several different stabs at evaluating them, though.
Of the 77 funds that still exist today, 34 now have
Morningstar Analyst Ratings. This subset looks
pretty good: There are no Negative ratings,
only five Neutral, and the rest are Morningstar
Medalists (two Gold, 15 Silver, and 12 Bronze).
Granted, Morningstar Analyst Ratings tend
to skew positive because funds that are rated are
generally those that have been good enough
to attract sizable asset bases, or at least good
enough to draw analyst attention. Still, our
sample looks especially good: 85% are medalists,
compared with 68% of the more than 1,200
U.S.-domiciled funds that have Analyst Ratings
today. Of course, how the remaining 33 of
our picks would have fared had they been rated
is an open question.
As evaluated by the Morningstar Rating-the star
rating, a measure of risk-adjusted performance-
our picks currently fare better than the overall
fund universe. As of April 30, 37 of the 77,
or 48%, had above-average ratings of 4 or 5 stars,
while only 18, or 23%, had below-average ratings
of 1 or 2 stars. That distribution is better than
might be expected of a random selection of funds:
Within each Morningstar Category, ratings
are distributed along a normalized bell curve that
assigns an equal number of above-average and
below-average ratings. As one third of funds
in each ratings group fall into each of those camps,
our universe looks better.
To be fair, though, those star ratings include past
performance extending as far back as 10 years
where available-which means they include part
of the history that led us to profile these
funds in the first place. In other words, we don't
necessarily get full credit for identifying funds
that would likely have high star ratings; many
already did when we featured them.
How has each fund done since we picked it? Our
record is mixed. Of the 77 funds, 37 of them,
or 48%, beat their category over a custom period



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