Nominees for 2017 Allocation/Alternatives Fund Manager of the Year
These all-weather funds skillfully navigated the year's climbing market.
Morningstar announced its 2017 Fund Manager of the Year nominees on Jan. 11 and followed with a series of articles detailing those in each award category. Today, we highlight the nominations for Morningstar Allocation/Alternatives Fund Manager of the Year. The winners for all asset classes will be announced on Wednesday.
A relatively smooth U.S. equity market in 2017 boosted returns for most allocation funds that were tilted toward stocks during the year. Growth-oriented equity outperformed value-leaning peers by the widest margin since 2009. In addition, international and emerging-markets equities soared even higher than domestic stocks.
Within fixed income, the Federal Reserve's improving confidence in the U.S. economy drove several rate hikes that extended an already-heated credit market. Ultimately, the U.S. Treasury yield curve flattened and the short end of the curve lifted in parallel, rewarding short-term bond funds with significantly less duration.
Within this generally upward-trending market, many alternatives funds struggled to stand out. Most alternatives managers benefit from their contrarian positions during dislocated markets, which were almost nonexistent in 2017. A low interest-rate environment and compressing spreads also didn't help. Our single alternatives nominee was notable for its ability to realize some benefit for investors as the spread between implied and realized volatility began to widen in the second half of the year.
This year's allocation nominees made wise tactical-allocation decisions that allowed investors to take advantage of 2017's soaring market. Of course, having one good year doesn't merit a nomination. To be considered as a Morningstar Fund Manager of the Year, a nominee must also boast a strong long-term record and a Morningstar Analyst Rating of Gold or Silver. We also prefer funds that benefit a large number of investors; the two target-date fund nominees, with a combined $235 billion in assets under management, certainly fit that description.
These managers' rigorous research, time-tested processes, and investment skill have set them apart in today's market. Here are the finalists:
Andrew Dierdorf and Brett Sumsion
Fidelity Freedom Funds (FFFEX)
2017 Return: 15.6%-22.3% (range for target retirement years 2020-60)
2017 Morningstar Category Rank (Percentile): 1-24
This is the first nomination for the Silver-rated Fidelity Freedom target-date series. One of the oldest and largest target-date fund offerings on the market, the Fidelity Freedom series has seen several changes since late 2012. Then, the team revisited the funds' strategic asset-allocation glide path, boosting the equity portion to become more in line with peers. It also added a number of underlying funds managed by well-regarded Fidelity portfolio managers, such as Steve Wymer, Joel Tillinghast, and Will Danoff. The management team also expanded with the addition of Brett Sumsion in 2014. An experienced allocator, Sumsion joined Andrew Dierdorf, who has been a comanager on this series since June 2011. The managers began implementing tactical asset allocation in August 2014. Although their tactical decision-making track record is brief, initial results have been positive. In addition, an abundance of research resources makes the path forward for this series look promising.
The adjustments made during the recent five years combined to deliver outstanding results for investors in 2017. The series' results ranked in the top decile relative to Morningstar Category peers, on average. Tactical decisions to underweight investment-grade bonds and overweight non-U.S. equities (including emerging markets) boosted results.
Paul Stewart, Michael Buckius, Daniel Ashcraft, and Kenneth Toft
2017 Return: 9.7%
2017 Morningstar Category Rank (Percentile): 50
Silver-rated Gateway has one of the longest track records in the alternatives category, and its veteran team has followed the same process for 40 years. Its 50th percentile ranking in 2017 among options-based peers misrepresents the fund's success because the category contains a variety of funds with different processes and wide-ranging risk targets. Gateway's straightforward collar strategy sells at-the-money call options on its underlying holdings. For downside protection, it also buys put options that offer protection if the market falls 7.5% to 10.0% below current levels.
Gateway's risk-tempered equity portfolio results in a smooth ride, maintaining an average 0.4 beta and a standard deviation well below the S&P 500's. Returns have been proportionate to its market exposure, similar to what an investor would expect from an equity/bond allocation fund with about a 40% weighting in equities. But Gateway has almost no correlation to a typical fixed-income index like the Bloomberg Barclays U.S. Aggregate Bond Index, as the fund is not exposed to credit or interest-rate risk. These attributes allow the fund to potentially provide diversification benefits, particularly in a rising-rate environment. Notably, in 2017, the managers were able to realize some benefits as the spread between implied and realized volatility began to widen in the second half of the year.
T. Rowe Price Capital Appreciation (PRWCX)
2017 Return: 15.4%
2017 Morningstar Category Rank (Percentile): 22
David Giroux, lead manager at Gold-rated T. Rowe Price Capital Appreciation, was the inaugural Morningstar Allocation Fund Manager of the Year in 2012, and he has been nominated nearly every year since then. Giroux's savvy allocation moves and disciplined approach delivered a 9.2% gain annualized since his June 2006 start date through the end of 2017, topping its typical allocation--50%-70% equity category peer by 3.6 percentage points. Strong results have attracted significant inflows, and the fund closed to new investors in June 2014.
Security selection within the fund's stock and bond sleeves has been remarkably successful on Giroux's watch. The stock sleeve about doubled the return of the S&P 500 during the past decade, and the bond sleeve outpaced the Bloomberg Barclays U.S. Aggregate Bond Index by more than 150 basis points annually. In 2017, top healthcare picks Abbott Laboratories (ABT) and PerkinElmer (PKI) both outperformed the S&P 500's broad healthcare sector. Plus, Giroux's sizable high-yield bond exposure also rewarded fundholders in 2017. He favored BB rated bonds because he believes they are overly punished for landing just outside of investment-grade status.
Giroux isn't afraid to keep dry powder on hand to take advantage of market corrections. In fact, the fund held about 14% in cash during 2017, well above its typical peer.
Anne Lester, Dan Oldroyd, and Team
JPMorgan SmartRetirement Target-Date Series (JSMIX)
2017 Return: 14.0%-22.1% (range for target retirement years 2020-60)
2017 Morningstar Category Rank (Percentile): 7-27
Anne Lester and her team won the 2014 Morningstar Allocation Fund Manager of the Year Award, and this is her third nomination for the Silver-rated JPMorgan SmartRetirement target-date series. Lester has been at the helm since the series' 2006 inception, and she's joined by the fund's day-to-day skipper Dan Oldroyd. They lead a tenured, stable team that benefits from the firm's vast resources.
A broad lineup of funds builds out the series' underlying investments. Having such an expansive lineup to choose from gives the series an edge versus closed-architecture peers with fewer funds available. Plus, the team is not afraid to unload poor-performing underlying funds when necessary.
The series' target-date funds, on average, ranked in the best quintile of their respective peer groups in 2017. The team's tactical positioning and selection of underlying managers contributed to outperformance. During 2017, the team's decision to overweight global equities relative to strategic targets, as well as increase its high-yield bond exposure, boosted results.
The SmartRetirement funds' long-term absolute and risk-adjusted returns land among the target-date universe's best, largely because of additive tactical decisions and solid manager selection. The series fared exceptionally well in both 2008's downturn and during 2009's rally, a testament to the resiliency of the glide path and the group's tactical aptitude.
Leo Acheson, Jeff Holt, and Patricia Oey contributed to this article.
Gretchen Rupp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.