Morningstar - Q3 2022 - 22

Dispatches
When I put together my own portfolio, I have a
slightly different take. I want diverse alpha
by manager and analyst staff. The best firms have
distinct sources of outperformance that
come from having elite managers, analysts,
quantitative tools, and trading desks. Thus, I see
real benefit to trying to tap more than one elite
investment team. (Low costs via passive funds or
low-cost active funds are another way to add
value, though technically that's beta, not alpha.)
When I looked at my portfolio last year, I was
struck that I didn't own any T. Rowe Price
equity funds. I did own T. Rowe Price High Yield
PRHYX in my 401(k). The omission is partly because
T. Rowe closes some of its funds to new investors.
But still, T. Rowe Price has some of the best
technology and healthcare analysts out there, and
the firm is not too shabby in other sectors.
I had loads of exposure to Primecap and Dodge &
Cox. I had Oakmark, American Funds, Pimco,
and one Artisan fund. But T. Rowe Price's great
analysts and managers weren't there. When
T. Rowe Price Mid-Cap Growth RPMGX reopened in
December 2021, my ears perked up. It has a
Morningstar Analyst Rating of Gold and is run by
Brian Berghuis. Of course, growth was pretty
pricey, so I didn't rush in.
However, when the growth meltdown got going
in May, I made my move. It went down some
more, and I bought some more. I also bought some
value and bond funds as the selloff continued.
But it felt good to get in on T. Rowe Price Mid-Cap
Growth, and I'm more likely to add to that position.
T. Rowe's funds in small- and mid-growth have
been outstanding. This fund has a huge asset base,
so it won't nimbly dive into small names at
just the right time, but I am optimistic it can find
some of the best mid-cap names and is taking
advantage of this selloff to add to favorite stocks
that will add zest on the way up.
Where might I be wrong? The biggest risk is
probably that this is like June 2000, of the 2000-02
bear market, and growth has a long way to
fall before coming back. That's certainly possible,
though I think the fundamentals in growth are
much better than they were in 2000, even if there
is plenty of froth.
22
Morningstar Q3 2022
Another risk is that Berghuis could retire in a
few years. That doesn't feel like as big a risk,
however, because T. Rowe Price has a deep bench
that's usually able to maintain outperformance
even when a star manager retires.
It's worth looking at portfolios from this angle.
Are there some great investors they lack,
and do these investors happen to line up with an
area that the portfolio needs? If so, it might
be worthwhile to build up a prospect list of great
managers and firms.
Russel Kinnel is director of manager research for
Morningstar Research Services LLC and the editor of
Morningstar FundInvestor.
were still novel to many investors and being
used predominantly as trading vehicles.
Also, within the advisor space, there were pockets
of familiarity with the concept of factors owing
in part to a rapidly growing and loyal army
of Dimensional Fund Advisors converts who were
well versed in size, value, and momentum.
Strategic-Beta
Market Slows
The first generation of strategic-beta exchangetraded
products came to the U.S. market in
May 2000. IShares Russell 1000 Growth ETF IWF
and iShares Russell 1000 Value ETF IWD were
not only the first but remain two of the five
largest strategic-beta ETPs. These funds
represented first-generation strategic beta,
introducing systematic style tilts to a market that
was already well versed in a style-based
approach to equity investing. Fast forward more
than 20 years to Dec. 31, 2021, and U.S.
strategic-beta ETPs numbered 622 and had
collective assets of $1.45 trillion.
Growth in strategic-beta ETPs has been driven
primarily by new adopters across the
investor spectrum, ranging from individuals to
state pension funds. Approximately 54% of
the aggregate growth in strategic-beta ETP assets
dating back to May 2000 has come from net
new inflows, while the remaining 46% reflects
asset appreciation. In many ways, the U.S.
market was well primed for strategic beta. The
Morningstar Style Box had popularized the
concept of style investing among U.S. investors
by the time the first strategic-beta ETPs were
launched in 2000. At that time, ETFs had
been around for about seven years, though they
Until recently, growth in assets in strategic-beta
ETPs outpaced that experienced by the
broader ETP industry. Strategic-beta ETPs' share
of the overall U.S. ETP marketplace climbed
as high as 21.6% as of the end of November 2019
from nil in 2000. Their market share gains
reversed in 2020. Strategic-beta ETPs' market
share dropped to 19.6% at the end of 2020, as they
lost ground to actively managed, thematic, and
environmental, social, and governance ETFs.
In 2021, U.S. strategic-beta ETPs clawed back some
of that lost ground. At year-end, they accounted
for 20.0% of overall ETP assets.
The first generation of strategic-beta ETPs
delivered straightforward style tilts. Subsequently,
there was a flurry of launches from 2005
to 2007, as strategic-beta-focused ETF providers
rolled out full families of more complex strategies.
These included Invesco's (then known as
PowerShares) roster of Dynamic and RAFI funds,
WisdomTree's suite of dividend-screened/
dividend-weighted funds, and First Trust's
AlphaDex lineup. Launches hit a lull from 2008 to
2010 thanks to the global financial crisis but picked
up again in 2011 as providers moved to cover new
bases (low-volatility strategies, for example).
New products accelerated in 2015, and from
2015 through 2017 a total of 285 new strategic-beta
ETPs were launched, representing 46% of
the 622 products that were on the menu at the
end of 2021.
Product launches have since slowed considerably
( EXHIBIT 1 ). There were just 17 new strategicbeta
ETPs rolled out in the U.S. in 2021, a
19% year-over-year decline and an 84% decline
from the 2015 record. While launches have
slowed, closures have accelerated. In 2020, 73
strategic-beta ETPs were closed. In 2021, another
11 were liquidated. We view the slowdown
in launches and the concurrent uptick in closures
https://www.morningstar.com/authors/35/russel-kinnel https://www.morningstar.com/funds/xnas/prhyx/quote https://www.morningstar.com/funds/xnas/prhyx/quote https://www.morningstar.com/funds/xnas/rpmgx/quote https://www.morningstar.com/etfs/arcx/iwf/quote https://www.morningstar.com/etfs/arcx/iwd/quote
Morningstar - Q3 2022

Table of Contents for the Digital Edition of Morningstar - Q3 2022
