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Ratings Changes for Funds From Fidelity, T. Rowe, and American

We've got upgrades, downgrades, and new ratings to share.

Russel Kinnel, 03/04/2013

My colleague Dan Culloton highlighted some ratings changes last week and I thought I'd keep the ball rolling with some more ratings changes and a couple of new first-time ratings. 

As Dan noted, our analyst ratings don't change often, but when the fundamentals change, we will adjust our ratings accordingly. We're digging into funds' competitive advantages to see how they stack up, and fundamentals are fairly stable over time. 

Newly Initiated Ratings
Fidelity Intermediate Bond FTHRX has much in common with its highly rated Fidelity taxable-bond peers, including a sensible, risk-conscious approach, an experienced manager, and a deep analyst staff. Although its somewhat restrained profile has led to muted returns relative to more-aggressive peers in recent years, its performance looks better on a risk-adjusted basis. Add in reasonable expenses--another feature of the Fidelity bond lineup--and this fund merits a Bronze rating. 

T. Rowe Price International Bond RPIBX has stayed true to its benchmark with large weightings in Western Europe and Japan and sizable exposures to the euro and yen. While poor performance from the European holdings is partly to blame for the fund's recent disappointing results relative to the diverse world-bond category, the fund also has slightly lagged its bogy during manager Ian Kelson’s 11-year tenure. The fund does have notable strengths: Kelson heads an experienced team of macro strategists and has added analyst resources to better follow the evolving European debt crisis. But for now, it merits a Neutral rating. 

Fidelity closed Fidelity Small Cap Discovery FSCRX to new investors as of Jan. 31. The fund saw a spike in inflows, and I’m pleased to see that Fidelity responded quickly. The fund, which has $4.9 billion in assets, went from getting $87 million in net flows in August 2012 to $247 million in December.

Manager Chuck Myers also runs $3.5 billion in Fidelity Small Cap Value FCPVX, which closed March 1. We raised our rating of Fidelity Small Cap Discovery to Gold because the closing addresses the biggest issue concerning us. 

Myers runs a concentrated small-cap, value-leaning strategy that's more sensitive to asset size than most strategies run at Fidelity. In seven years at Discovery Myers has run circles around his peers and benchmark. Small Cap Discovery has an 89% cumulative return versus 39% for its benchmark since Myers took over the fund in March 2006 through January 2013. The fund had a remarkable string of five straight top-quartile performances from 2008 to 2012. Only 10 funds in our entire U.S. fund data­base can make a similar claim. 

American Funds Capital World Growth & Income CWGIX was elevated to Gold from Silver on the strength of its excellent performance. The change was driven in part by an upgrade in the Performance pillar to Positive. While the fund has turned in several middling showings in recent years, its long-term record remains impressive, particularly on a risk-adjusted basis. It bounced back a bit in 2012, too, with a near top-quartile return. 

The $1 billion Aston/Tamro Small Cap ATASX has quietly assembled an impressive record during lead manager Philip Tasho's 12-year tenure, prompting an upgrade to Silver from Bronze. Its 10.8% annualized gain over that span trumps the Russell 2000 Index by more than 4 percentage points. Tasho’s flexible strategy combines market leaders, turnaround plays, and innovators in a relatively concentrated portfolio of 50 to 70 stocks, yet the fund hasn't been any more volatile than its average peer. It’s closed to new investors. 

Longtime manager Preston Athey announced he will step down from T. Rowe Price Small-Cap Value PRSVX in June 2014, leading to the fund’s downgrade to Bronze. The long lead time is admirable, allowing a lengthy transition for successor David Wagner. However, Athey had driven the fund’s peer-beating record during his 21 years at the helm, so his departure is a loss. Wagner has served as the fund’s associate portfolio manager since 2005 and knows many of the holdings. He’s also run a small/mid-cap strategy available for sale outside of the United States, but Wagner’s management skills aren’t proven enough to keep the fund at Silver. 

Bogle Small Cap Growth BOGLX looks strong on two key fronts. For one, lead manager John Bogle Jr. has 25 years of experience in quantitative investing, first at State Street Global Advisors and Numeric Investors and then at his own firm, Bogle Investment Management, which he launched in 1999. And unlike most quant fund rivals, this fund’s process has helped it recover from the 2007-09 bear market more quickly, helping it generate more-consistent outperformance versus its peers and the Russell 2000 Index. That said, it hasn’t fared as well on a risk-adjusted basis compared with Morningstar analysts’ favorites in the small-blend category, which triggered a downgrade in its rating to Silver from Gold.

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. (Click here for a free issue). Mr. Kinnel would like to hear from readers, but no financial-planning questions, please. Follow Russel on Twitter: @russkinnel.

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