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Fund Spy: Morningstar Medalist Edition

Future Retirements Whack the Present U.S. Morningstar Analyst Ratings of 2 Accomplished T. Rowe Price and Vanguard Funds

How the pending retirements of two key managers affect their funds' ratings and more highlights from July's Morningstar Analyst Ratings.

Morningstar updated the Morningstar Analyst Ratings for 649 fund share classes, exchange-traded funds, and separately managed accounts/collective investment trusts in July 2021. Of these, 544 maintained their prior rating, 38 were upgraded, 30 were downgraded, 30 were new to coverage, and seven were placed under review as a result of material changes, such as manager departures.

Looking through share classes and vehicles to underlying strategies, Morningstar issued 161 Analyst Ratings during July. Of these, 14 were new to coverage, and the remainder had at least one investment vehicle that had been previously covered by a Morningstar analyst.

Morningstar also rated 23 new Model Portfolios in July.

Below are some of the highlights of the downgrades, upgrades, and funds new to coverage.

Downgrades:

The drop in T. Rowe Price Mid-Cap Value’s (TRMCX) Morningstar Analyst Rating to Neutral from Gold highlights the interrelationship of an investment strategy’s People and Process Pillar ratings. Longtime manager David Wallack has nearly another year before his recently announced retirement, but the 2016 Morningstar Domestic-Stock Fund Manager of the Year is almost irreplaceable. Over his more than 20-year tenure, his own analytical insights and knack for finding disappointing companies on the cusp of improvement have become inextricably intertwined with this strategy’s approach. Wallack’s appointed successor, Vincent DeAugustino, professes to follow a similar contrarian style and has analyzed financial stocks for T. Rowe since 2015, but he has no public portfolio management record. It’s not fair to expect DeAugustino to become the same kind of manager as Wallack, but he still must prove himself.

A looming retirement also took Vanguard International Growth’s (VWILX) Analyst Rating down but only by one notch to Silver from Gold. James Anderson, who has served as a manager for subadvisor Baillie Gifford Overseas on this fund since 2003, plans to step down in April 2022. He’ll leave his responsibilities in the capable hands of colleagues from the deep and well-regarded Scottish firm. A solid team from Schroder Investment Management also remains on the job. Baillie Gifford, however, now runs about 70% of the strategy’s assets, and Anderson has been the firm’s leading proponent of its aggressive approach, which focuses on identifying and investing in a concentrated collection of disruptive growth companies. It’s another case of Process mingling with People. Baillie Gifford’s next generation of managers is seasoned and impressive, but they may not execute its unique style as successfully as Anderson did, and the market environment may not be as hospitable toward such an aggressive approach.

Upgrade:

Janus Henderson Contrarian’s (JSVAX) manager since 2017, Nick Schommer, may still have some proving to do, but the strategy’s process is winning adherents. The Analyst Ratings for the fund’s cheaper share classes rose to Bronze from Neutral as increased conviction in its approach lifted its Process Pillar rating to Above Average from Average. It’s a concentrated style. Schommer is benchmark-agnostic, owns around 40 stocks, and keeps close to half the strategy’s assets in its top 10 holdings. He tries to vary the out-of-favor companies he owns, though, by the reasons for their low valuations--misunderstood business models, undervalued assets, and overlooked growth opportunities. The result, so far, has been an eclectic portfolio that has done very well over Schommer’s tenure.

New to Coverage:

VictoryShares USAA MSCI USA Small Cap Value Momentum ETF (USVM) debuted with a Silver Analyst Rating because it manages to avoid many of the riskiest small-cap stocks and diversifies risk effectively. The fund tracks the MSCI USA Small Cap Select Value Momentum Blend Index, which selects stocks based on their combined value and momentum traits. The ETF is really all about value, though, because the index compares stocks’ value and momentum factors to their sectors, and it’s hard to isolate momentum that way. The fund also tends to give the less volatile stocks more weight, which tends to emphasize the portfolio's cheaper, smaller holdings. For similar reasons, VictoryShares USAA MSCI USA Value Momentum ETF (ULVM), which tracks the MSCI USA Select Value Momentum Blend Index, also earned a Silver medal as its first rating.

The Dimensional Core Wealth Model Portfolios earned Silver and Bronze ratings, depending on their allocation to DFA’s solid equity lineup. The portfolios have admirable traits: stable asset allocation, disciplined investing, broad diversification, and low fees. Those with more than 50% equity earn Silvers, while those with more than 50% fixed income got Bronze. DFA’s equity funds have been better performers than its bond funds, and the bond-heavy portfolios have short durations that will likely damp returns.

Dan Culloton has a position in the following securities mentioned above: VWILX. Find out about Morningstar’s editorial policies.