How funds from PIMCO, T. Rowe Price, and Fidelity became Bronze medalists or Neutral-rated funds.
With more than 350 mutual funds rated and counting, the fund analysts and those of us on the ratings committees had a slew of interesting discussions about the merits of the funds we've rated. Many of the most fascinating have been around funds that we ended up with a Morningstar Analyst Rating of Neutral or Bronze. (If you want to see every fund in a ratings group, go to our Premium Fund Screener and select Morningstar Analyst Rating from the "Select Data to Screen on" drop-down menu.)
Funds with middle-of-the-road ratings can have tremendous value, too. We tend to write a lot about the best and worst, but it's helpful to clarify exactly where the rest of the fund world stands. That's particularly true for some of the newer funds or those with newer managers.
So, here I'll unearth some highlights of our analyses on Bronze and Neutral funds, starting with the Bronze funds. For Bronze funds, the strengths outweigh the minuses, but there are drawbacks, to be sure. Neutral funds might have some big pluses and minuses that cancel each other out or it could be that you don't have much of either one to make the fund stand out in a positive or negative way.
To get the whole story, please click through to the analysis for each fund.
Since its debut in late 2008, PIMCO Unconstrained Bond PFIUX has been one of the hottest sellers around. After all, who wouldn't want to give PIMCO greater discretion on duration (a measure of interest-rate sensitivity), countries, and sectors in light of the threat of an interest-rate spike? Well, in practice there are some issues and limitations but also strong appeal given PIMCO's prowess. That's why this fund rates as a Bronze. So far it hasn't done much but there is potential.
Morningstar analyst Eric Jacobson's description of the fund's process highlights its tremendous flexibility: "(Manager Chris Dialynas and the investment committee) determine interest-rate, yield-curve, currency, country, sector, and individual issue-level decisions. From an interest-rate perspective, Dialynas has broad freedom to work inside a duration range of negative 3.0 to 8.0 years. The fund can also invest up to maximum 40% in high yield and a maximum 50% in emerging markets; it will normally limit its investments in non-U.S. currency to 35%."
For index funds, tracking error and fees tell you a big piece of the story. In the case of the Bronze-rated Spartan U.S. Bond Index FBIDX, tracking error is the problem. Senior analyst Sarah Bush writes that the fund held bonds that were not in its index; the 8% from outside the index came back to bite investors in 2007 and 2008 as the fund's tracking error jumped. Since then Fidelity has acted to correct that. As a result, nonindex names are down to 1% of the portfolio. Tracking error has come down, too. So, we ding the fund for past issues but also give it credit for addressing those problems and for its super cheap expense ratio.
Ariel ARGFX has a Bronze rating, as well. On the plus side, manager John Rogers has a strong record on this fund dating back to 1986. In addition, I like the fact that the firm has built up an experienced staff of managers in recent years. On the negative side, the fund's performance has gone from mild-mannered to volatile as the sluggish economy has kept some of the holdings on a roller coaster. Still, I think over the long haul the fund can revert to its past form of delivering pleasing risk-adjusted returns. This passage sums up Ariel's pros and cons:
"Rogers' approach with cyclicals exposes the fund to more volatility but not much chance of a permanent loss of capital. Even through the 2008-09 recession, all of its holdings remained profitable and today the portfolio collectively has a stronger balance sheet as well as strong cash flow and profits. However, Rogers' patience means he often rides stocks up and then some of the way back down unlike some deep-value investors who sell once a name hits an industry or historical valuation multiple. For example, newspaper publisher Gannett GCI is a strong cash-flow generator but in a shrinking industry. Rogers made a profit by adding all the way down to around $2 per share in 2009, but he only trimmed his stake a bit as it topped $18, and now it's back down to $11."
T. Rowe Price Value TRVLX has a Neutral rating primarily because its manager is unproven. Though Mark Finn does have more than 20 years of experience at the firm, he has at been at the helm of this fund for less than two years and has no other portfolio-management experience. Thus, we just don't have enough information to judge his money-management skill. This fund is more in the camp of funds without a lot of strengths or weaknesses to make it stand out. As we have more conversations with Finn and more data on how he invests, chances of a positive or negative rating will increase.
American Funds Bond Fund of America ABNDX seems to be less than the sum of its parts. While having multiple portfolio managers works just fine for equities, it can be a mixed blessing in bonds as Janet Yang explains in the Process section: "Since the six portfolio managers independently manage their sleeves of the fund, there's room for a wide range of viewpoints to be expressed in the holdings. For example, in mid-2011, the highest average duration among the fund's investment-grade manager portfolios was six years and the lowest was about four years. While the managers argue that the system allows them to balance an amalgam of different views, managers who adopt opposite views on rate-sensitivity could effectively cancel out one another's views."