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Fund Spy: Morningstar Medalist Edition

Downgraded Teams Lower the Ratings for These Dodge & Cox and Invesco Funds

Here are some highlights from June.

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Morningstar updated the Analyst Ratings for 786 fund share classes, exchange-traded funds, and separately managed accounts/collective investment trusts in June 2021. Of these, 617 maintained their previous rating, 30 were upgraded, 54 were downgraded, 65 were new to coverage, and 20 were placed under review as a result of material changes, such as manager departures.

Filtering share classes and vehicles to isolate unique strategies, Morningstar issued 194 Analyst Ratings during June. Of these, five were new to coverage, and the remainder had at least one investment vehicle that had been previously covered by a Morningstar analyst. Below are some of the highlights of the downgrades, upgrades, and funds new to coverage.

Downgrades

Dodge & Cox Balanced (DODBX) is taking positive steps in building out a dedicated multi-asset team. However, it falls short against well-established teams, warranting a downgrade of its People Pillar rating to Above Average from High. As a result, the fund's Morningstar Analyst Rating has been downgraded to Bronze from Silver. In 2020, the firm established an eight-person multi-asset working group, which includes members of its U.S. equity and fixed-income committees, plus dedicated risk and asset-allocation researchers. Compared with other topnotch allocation peers, it is relatively modest in size and resources. Previously, the U.S. equity committee adequately managed this strategy with ad-hoc contributions from the fixed-income team. The new working group should formalize a more holistic approach. The fund consists of two sleeves that mimic Dodge & Cox Stock (DODGX) and Dodge & Cox Income (DODIX). Both Gold-rated funds are strong options in their respective Morningstar Categories, large value and intermediate core-plus bond, but they don't complement each other well, particularly given the fund's persistent overweight in equities compared with its 60/40 benchmark. The bond sleeve's penchant for leaning into credit risk makes it less resilient when stocks tumble. It has consistently tipped this fund off balance during periods of stock market stress, like the first quarter of 2020.

Longtime manager Jason Holzer will retire from Invesco European Small Company (ESMAX) on Sept. 30, 2021, resulting in a People Pillar downgrade to Above Average from High. The fund's Analyst Ratings across most share classes have been lowered to Bronze from Silver, while the costly C shares fall to Neutral from Bronze. Although Borge Endresen has been a comanager on this strategy with Holzer for about 20 years, and there are no expected changes to the process, only one analyst supports this strategy, cutting this already slim team down to two. The strategy takes its small-cap mandate seriously; it typically owns 30% to 40% in micro-caps. So, the remaining team will have a lot of ground to cover to monitor a universe that includes many micro-caps and other stocks that are well off the usual radar.

Upgrade

Oakmark International Small Cap's (OAKEX) disciplined and robust investment process earned it a Process Pillar upgrade to High from Above Average, which raised its Analyst Rating to Gold from Bronze across most share classes. Its more expensive share classes were upgraded to Silver. Experienced portfolio managers David Herro, Michael Manelli, and Justin Hance build a high-conviction portfolio consisting of about 50-60 smaller-cap value stocks. They consistently implement their bottom-up approach that looks for companies with sustainable growth opportunities, stable finances, and are trading at about 30% below management's estimate of intrinsic value. The fund has been more volatile than other foreign small/mid-value peers but has rewarded investors who have been able to stick with it over the long haul.

New to Coverage

Hartford Strategic Income's (HSNIX) skilled team from subadvisor Wellington follows a disciplined, value-driven process resulting in an inaugural Analyst Rating of Silver for its cheaper share classes, while its more expensive ones are rated Bronze and Neutral. Experienced comanagers Campe Goodman, Joseph Marvin, and Robert Burn have steered this multisector bond fund together since 2012. A large analyst team and seasoned cohort of sector specialists provide sound support for the managing trio. Similar to other multisector bond peers, the fund pulls together high-yield bonds, emerging-markets debt, and bank loans with a moderate mix of investment-grade corporates, U.S. Treasuries, and agency and nonagency mortgages. Strong risk management ensures that the portfolio remains diversified and that the managers can take advantage of credit market inefficiencies.

American Funds Mortgage (RMAGX) benefits from a straightforward approach executed by an experienced and well-resourced team supporting an initial Analyst Rating of Silver for its cheapest share classes, while its pricier shares earn Bronze or Neutral ratings. Fergus MacDonald has managed this fund for over a decade, and mortgage specialists David Betanzos and Oliver Edmonds were added to the manager roster in 2013 and 2019, respectively. They each run a sleeve of the portfolio, and 10% of the strategy's assets are reserved for the highest-conviction ideas of contributing analysts. The fund provides ballast during rocky markets with a conservative approach to the mortgage market. Most assets reside in agency mortgage-backed securities, but the team will dial down that allocation in favor of U.S Treasures and cash when valuations are tight. For example, the strategy had 60% in agency MBS coming into 2020, though the team began ramping up that stake to a high of 84% in June 2020 in light of the Federal Reserve's support to the sector, before scaling back to 53% of assets in March 2021 as valuations tightened.

Megan Pacholok does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.