8 Ratings Upgrades to Cap 2018

In December, Morningstar manager research analysts upgraded the Morningstar Analyst Ratings of seven funds and one separately managed account, downgraded the ratings of 10 funds and one SMA, and affirmed ratings on 127 funds and two SMAs. The team also assigned new ratings to 11 funds and four SMAs and placed three funds under review. Below are some of December’s highlights, followed by the full list of ratings changes.

Affirmed IShares MSCI EAFE ETF EFA maintained its overall Bronze rating in December and continues to offer a standout option for a diversified, market-cap-weighted, foreign-stock exchange-traded fund. It held more than 900 stocks as of December 2018, and its top 10 holdings represented 13% of portfolio assets. So, it has a diverse base to help to avoid some of the volatility caused by the market's worst performers. The fund has struggled during sluggish markets versus some of its peers that can actively hedge risk. It also excludes stocks from Canada and emerging markets, so its long-term returns have lagged those of its foreign large-blend Morningstar Category peers, which typically hold a combined 10% allocation. But the fund's market-cap-weighted structure provides the benefit of lower turnover and trading costs. Its 0.32% expense is also less than half of the category average 0.86% expense ratio.

Upgrades T. Rowe Price New Horizons PRNHX was upgraded to Gold from Silver in December thanks to its ability to remain a superb long-term option despite a growing asset base and rising market cap. Henry Ellenbogen began managing this fund in March 2010 after successfully leading T. Rowe Price Media & Telecommunications PRMTX for four years. He works closely with the firm's team of analysts and growth managers; spending more time with different members of the group as new analysts join the team or certain sectors that the fund invests in require more of his attention. Ellenbogen focuses on companies with good business models, strong corporate cultures, and sensible management teams. His goal is to buy resilient growth companies that cater to specialty markets with good franchises and strong growth potential, including a 5% position in private emerging growth companies. The fund is quite large and held $22 billion of assets as of late 2018. The resulting, diversified portfolio of nearly 200 positions has helped the fund capture only 75% of its Russell 2000 Growth Index benchmark's losses while outperforming 99% of peers during Ellenbogen's March 2010-November 2018 tenure. Relatively cheap fees only further the fund's appeal.

Downgrades An evolving investment approach that appears to have pulled the fund's respectable team out of its comfort zone led to a downgrade to Bronze from Silver for Aberdeen Emerging Markets ABEMX in December. Aberdeen Standard's approximately 65-member investment team is led by global head of equities Devan Kaloo. He and head of global emerging markets ex-Asia, Joanne Irvine, have spent most of their careers at the firm and bring strong investment insights to the team. The departure of several members of the Asia-Pacific team, including four investment managers, casts something of a pall on it. But the evolving process is the largest concern here. In particular, the team has adjusted its thinking on corporate governance standards. It had preferred to get its Chinese exposure through Hong Kong-listed names in the past, largely because of corporate-governance and transparency concerns. But it adjusted its stance on several Chinese positions in 2017 owing to the fund's poor performance and chose to quickly increase the fund's mainland position weighting to 25% of assets in October 2018 from 10% in September 2017. The fund's active share also shrunk, which further highlighted the team's shift in thinking and the fund's middling fees. Though the sudden change does bear monitoring, the fund's experienced, deep team and long track record remain intact, leaving it with several positive attributes.

New Ratings:

Eaton Vance Global Macro Absolute Return EIGMX was added to coverage last month. Its strong, stable team of experts and unique process lead to an initial rating of Bronze. The fund is led by comanagers Michael Cirami, Eric Stein, and John Baur. Cirami and Stein also serve as co-directors of Eaton Vance's global-income group. Each of the three comanagers has more than 10 years of firm experience, and the management team has remained stable since the 2012 departure of former lead manager Mark Venezia. The team takes a dynamic approach. The managers buy long and sell short positions across local and external sovereign credits, currencies, and rates in more than 125 countries. Unlike most peer funds that use short positions only to hedge long holdings, their goal is to have each long or short position stand up on its own. Their use of a combination of economic leverage and healthy doses of emerging-markets exposure makes this fund riskier than most peers. But the team has found ways to add value in a variety of economic settings. It has shown strong downside protection versus nontraditional category peers, though the fund's 273 basis-point annualized excess return over cash during the 10-year stretch ended November 2018 falls short of its 300-500 basis point goal. But the fund mitigated losses better than nearly all of its peers during the period. Last, its cheaper-than-average price tag versus peers helps mitigate its performance goal lag.