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The 5 Biggest Downgrades of 2021

We lowered our ratings on some funds from the biggest shops, including Vanguard, T. Rowe Price, Fidelity, and American Funds.

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A version of this article was published in the September 2021 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

Last month I told you about our biggest upgrades so far in 2021. 

Now it's time to look at the five biggest downgrades. As you'll see, we will change a fund's Morningstar Analyst Rating when a manager change is announced rather than wait for the date it goes through. These are forward-looking ratings aimed at picking long-term outperformers. So, if a manager change is set for year-end, we know that you are only getting a few months of the outgoing manager and many years of the new manager.

I'd also point out that all of the Morningstar Medalist levels are still recommended, so a downgrade to Silver or Bronze is very definitely not a sell signal. Rather, it's an indication that we think a fund is still attractive but has lost some of its appeal, whether that's due to rising fees, a manager change, a reassessment, or the fundamentals. I'd encourage you to click through the full analysis to get the complete picture for these funds.

American Funds Capital World Growth and Income (CWGIX)

Silver to Bronze

One of the strengths of the American Funds is that they are pretty stable. With multiple managers and a commitment to following the prospectus strategy, they are dependable and easy to own for the long haul. But they are not immune to the challenges faced by other firms. We downgraded this fund after a number of manager changes--some were smooth transitions around retirements, but others were surprises.

We cut this fund's People rating to Above Average from High, moving the A shares to Bronze from Silver. Three managers stepped off as part of a reorganization, but then the firm terminated lead manager Mark Denning, and Joyce Gordon moved on to other funds. Further, a month after our downgrade, American announced the departure of Alex Sheynkman. That's a lot of change. On the plus side, the new and remaining managers are experienced, the strategy is still sound, and fees are still modest.

Fidelity Large Cap Stock (FLCSX)

Silver to Bronze

This time it's a Process Pillar downgrade. Our issue is with managing the downside. Within the context of large-blend strategies, Matt Fruhan seeks out undervalued companies. The trick with that strategy is avoiding value traps, or companies that are cheap and getting cheaper because their fundamentals are deteriorating. Every value strategy suffers from some of those missteps, but Fruhan has had more and held on longer. This led us to downgrade the Process rating to Average from Above Average.

Those missteps have led to mediocre long-term performance, though the fund has at least rebounded nicely with the value resurgence this year.

T. Rowe Price Mid-Cap Value (TRMCX)

Gold to Neutral

Like American, T. Rowe Price has provided tremendous stability in management and strategy. This one kind of caught me by surprise. David Wallack announced he will retire in June 2022, but his replacement doesn't have as much experience in general or on the fund, which is not what we typically see in these situations at T. Rowe Price. We cut People and Process to Average from High and the overall rating to Neutral.

We don't have much to go on with successor Vincent DeAugustino, who joined T. Rowe Price in 2015, after several years as a sell-side analyst. His experience covering financials may come in handy for this value-oriented strategy, though he has no public track record running money. He has contributed financials picks to the analyst-run strategy, though that's much different from running a diversified portfolio with significant assets.

Templeton Global Bond (TPINX)

Silver to Neutral

This fund has stuck to its guns, and that means it has been wrong for a long time. Manager Michael Hasenstab has been bullish on emerging markets and bearish on U.S. bonds. The fund kept duration near zero while maintaining outsize bets on Ukraine and other emerging markets. We stayed positive on the fund given Hasenstab's past record, but eventually we have to conclude that he's not as good as we thought.

Vanguard International Growth (VWIGX)

Gold to Silver

We feel pretty good about the transition going on at subadvisor Baillie Gifford, but with James Anderson retiring in April 2022, we thought Above Average was a more appropriate People rating. That took the fund's Analyst Rating down to Silver from Gold--still a high rating.

Baillie Gifford runs 70% of the fund, and next year Tom Coutts and Lawrence Burns will move up a notch to fill in for Anderson. Both are very experienced in the strategy, and we expect the new managers to stay the course.

 

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