5 of the Biggest Upgrades in 2021

The Morningstar Analyst Ratings are fundamentally driven. We focus on a fund's people, process, parent, and price in arriving at our ratings. We talk with portfolio managers, run performance attribution data, examine portfolio changes, visit (virtually for now) with firms' compliance teams, traders, analysts, and key executives, and then distill that into a rating.

Repeating that process over the years can lead us to change our opinion, as can events like changes to the performance profile and the fundamentals listed above. Upgrades to the ratings tend to be spurred by a subtle accumulation of favorable discoveries, while some downgrades often result from more dramatic events like manager departures and portfolio blowups.

Let's look at some of the more prominent upgrades.

T. Rowe Price Retirement 2035 TRRJX

Prior to our most recent review, we already had a High rating for the Parent and People Pillars on T. Rowe Price's target-date funds. Then we raised Process to High from Above Average, which took the funds' overall Analyst Rating to Gold from Silver (their priciest share class remains Bronze). We were impressed by changes T. Rowe made to the target-date funds' glide path and how well the team executed that transition.

T. Rowe Price researched the risks to investors and how they would respond to different levels in fund volatility. It determined that the greatest risk for investors was not taking enough risk to reach their goals and that investors had the stomachs for a little more volatility. As a result, the team dialed up equity exposure. More than the result of the shift, we liked the team's process for researching allocation and its implementation of that research.

Oakmark International Small Cap OAKEX

We raised our Analyst Rating on this fund to Gold from Bronze by way of a Process upgrade to High. A strong comeback from the coronavirus-induced bear market validated the value-focused process of managers David Herro, Michael Manelli, and Justin Hance. Foreign small- and mid-cap value stocks are relatively risky and generally very vulnerable to global slowdowns, but there can also be some rewarding bargains.

Management looks for companies trading a steep discounts to what it thinks they could be acquired for, and it also conducts discounted cash flow analysis. That leads to a focused portfolio of 50-60 names with some real upside.

Vanguard Dividend Appreciation Index VDADX

Occasionally, overall ratings change as all pillars remain untouched. This fund was upgraded to Gold from Silver because of the interplay of pillar ratings, fees, and the ratings of other funds. Our Analyst Ratings begin with an estimate of alpha potential across all Morningstar Categories, then apply a given fund's pillar scores to derive an alpha expectation before fees. For passive funds, we weight Process as 80%; People and Parent each account for 10%. Fees are then subtracted and overall ratings are slotted in based on the mix of fees and pillar ratings of other funds.

This is an excellent passive fund that charges just 0.08% for Admiral shares and 0.06% for the exchange-traded fund (VIG). We rate both People and Process at Above Average and the Parent High. With super cheap fees and strong pillar scores, it probably only took a downgrade or a couple of costlier funds to nudge this fund into Gold territory.

The idea of investing in companies with the potential to boost dividends is one of my favorites for its elegant simplicity. The process of seeking such companies indirectly leads to companies with healthy balance sheets and growing profits. Compare that with simply buying stocks with the highest yield, a process likely to lead you to companies with poor financial health and marginal growth prospects. The fund recently switched benchmarks to the S&P Dividend Growers Index, which looks for companies with a consistent history of dividend hikes over the past 10 years.

T. Rowe Price Floating Rate PRFRX

T. Rowe Price was late to the bank-loan category, but the firm really nailed it. It launched the fund under manager Paul Massaro in 2011 and built up a strong staff around him. That's huge because bank loans require quite a bit of research. They are mainly below investment grade and tough to sell from a portfolio, so you need skilled managers, analysts, and traders to make it work.

Massaro has taken a fair amount of risk, but the fund generally has had marketlike losses in downturns and outperformance in rallies. We first covered it in 2020, and on the second time around upgraded its People Pillar to High from Above Average in March 2021. Along with High ratings for Process and Parent, that raised the fund to Gold from Silver.

T. Rowe Price Global Growth Stock RPGEX

Way to hog all the upgrades, T. Rowe. We upgraded this fund's Process to High, giving it High ratings across the board and an overall upgrade to Gold from Silver. Manager Scott Berg has really impressed over his 13 years at this world large-stock growth fund. He's an aggressive investor in some ways. He has a fourth of the fund's assets in emerging markets and runs fairly high portfolio turnover in the 80% neighborhood. So, we took our time before giving the fund a High Process rating.

Berg mutes some of that aggression by running a fairly diffuse portfolio of names he thinks will dial up growth via productivity gains. We're impressed that he's generally steered the fund from downside and toward more upside than the benchmark and peers. Also impressive is that our move to style-based world-stock categories hasn't taken the shine off its relative performance against a higher-returning peer group. The fund's total returns rank in its category's top decile for the trailing one, three, five, and 10 years.