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Ratings Changes for Funds From Artisan, GoodHaven, JP Morgan, and BlackRock

Our assessment of management and management changes fueled two upgrades and two downgrades recently.

Michael Herbst, 03/18/2013

Since we launched the Morningstar Analyst Ratings in late 2011, we're often asked when, why, and how often those ratings change for individual funds. The short answer is that we do not expect our ratings on individual funds to change all that often.

In assigning the initial rating, we take a close look at five pillars--People, Process, Parent, Performance, and Price. In our experience, those fundamentals are not likely to change frequently--and it is generally a red flag if they do. Our analysts are responsible for monitoring each of the ratings they assign on an on-going basis and for incorporating new information into their analyses as appropriate. In some cases, new information, while valuable, does not necessarily move the needle. Below we highlight a few recent examples of when it has.

Artisan Small Cap ARTSX
New Morningstar Analyst Rating:
Previous Morningstar Analyst Rating:
Two other funds run by Andy Stephens and team, Artisan Mid Cap ARTMX and Artisan Global Opportunities ARTRX, are rated Silver because we love their experience and time-tested approach, as well as those funds' strong long-term risk-adjusted performance. Our initial Bronze rating here reflected reservations regarding Craigh Cepukenas, who was partially responsible for the fund's weak performance prior to October 2009.

At that point, Stephens and team took over and Cepukenas stepped into the lead role. It is never a given that those kinds of transitions will succeed, but in this case, Cepukenas has meshed well with Stephens and team, and the fund's performance under his watch has been promising. Greater confidence in the fund's People and a shift in its Performance pillar to Positive from Neutral led to the new rating.

GoodHaven GOODX
New Morningstar Analyst Rating:
Previous Morningstar Analyst Rating:
This relatively young large-value fund has a strong pedigree in comanager Keith Trauner and Larry Pitkowsky. That is a tough process to execute well, especially as Trauner and Pitkowsky have also been setting up their new firm, GoodHaven Capital. Yet the duo worked together for nearly a decade with Bruce Berkowitz at Fairholme FAIRX, and during their time on that fund its results were excellent. Here they ply a similar go-anywhere, contrarian, and concentrated approach (holding roughly 20 stocks).

GoodHaven Capital is setting a good stewardship example, with one strategy, significant portfolio manager investment (both managers have more than $1 million invested in the fund), and a commitment to close this fund when assets in their single strategy approach $3 billion-$5 billion. As investors, the duo and the fund are off to a great start in this setting. A higher degree of confidence in the fund's Process, promising signs from its lengthening Performance, and evidence that GoodHaven Capital is putting fund shareholders' interests first resulted in the move to Bronze from Neutral.

JPMorgan Small Cap Equity VSEIX
New Morningstar Analyst Rating:
Previous Morningstar Analyst Rating:
This fund's lead manager, Glenn Gawronski, left the firm on Feb. 4, 2013. Gawronski was the chief architect of the fund's strategy and generated stellar long-term results. Former comanager Don San Jose has taken over as lead manager. Although he worked alongside Gawronski since 2004 and intends to pursue the same approach, Gawronski's departure is a real loss, and there's no guarantee San Jose's work as an analyst will translate into success in the lead manager role.

Furthermore, a number of changes in the analyst team, with one departure and one new hire in 2012 and an additional hire likely in 2013, means it will take time to assess how the team is gelling and how the portfolio will evolve on San Jose's watch. Because of those changes, we reset the fund's People and Performance pillars to Neutral from Positive and lowered the fund's overall rating to Neutral.

Michael Herbst is an associate director of fund analysis with Morningstar.
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