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Fund Spy: Morningstar Medalist Edition

Elevated Risk, Limited Experience Lower the Ratings for This Pair of Bond Funds

Here are some highlights from September.

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Morningstar updated the Analyst Ratings for 813 fund share classes, exchange-traded funds, and separately managed accounts/collective investment trusts in September 2021. Of these, 412 maintained their previous rating, 40 were downgrades, 18 were upgrades, 50 were new to coverage, and 293 came under review because of material changes, such as manager departures.

Sifting out multiple share classes and vehicles, Morningstar rated 120 unique strategies in September 2021. Of these, 10 received a rating for the first time, with the rest having at least one investment vehicle type that a Morningstar analyst previously covered. Below are some highlights of the upgrades, downgrades, and new to coverage. 

Upgrades

Calvert Equity's (CEYIX) four-person, environmental, social, and governance-focused team received a People Pillar upgrade to Above Average from Average, which boosted its I and R6 share classes to Silver, while its pricier A and C shares got Bronze and Neutral, respectively. Most of the Atlanta Capital team's four members have solid ESG credentials, and each has at least two decades of industry experience. The small team, led by Joe Hudepohl since June 2015, manages three strategies with a lot of overlap.

MFS Limited Maturity (MQLIX) received a Process Pillar upgrade to Above Average from Average, resulting in an Analyst Rating upgrade to Bronze from Neutral for its I, R4, and R6 shares. The fund's most expensive share classes received Neutral or Negative ratings. The Process rating upgrade was the result of recent investments in its analyst team and a demonstrated ability to add value in the securitized space. Managers Phil Burgener and Alex Mackey use the best ideas from MFS' experienced fixed-income team, which shored up its bench by adding several securitized credit specialists. This bolstered conviction in the team's ability to conduct thorough bottom-up research. 

New to Coverage

Amy Zhang's Alger Mid Cap Focus (ALOAX), which launched in June 2019, graduated from the Morningstar Prospects list with Silver ratings for all share classes. The fund is a natural extension of Zhang's work at Alger Small Cap Focus (AGOZX), and like that strategy, it earns a High Process rating. Zhang looks for companies with at least $500 million in operating revenue with healthy balance sheets, durable business models, and attractive long-term growth prospects. She'll draw ideas from Alger Small Cap Focus and tends to hold stocks for three to five years. The 50-stock portfolio carries valuation risk: Its average price/projected earnings ratio of 60 is nearly double the Russell Midcap Growth Index's 32. Nearly 10% of the portfolio's assets are also in micro-cap names, which is almost unheard of in mid-growth funds.

Downgrades

Concerns around the level and complexity of Templeton Global Bond's (TPINX) risk-taking dropped its Analyst Rating to Neutral from Silver across all share classes. Michael Hasenstab and Calvin Ho run this high-conviction, long-term-oriented process that pays a lot of attention to global rates and currencies. Hasenstab and his team historically have taken concentrated bets and been willing own the maximum allowed by local market regulators. However, the fund has gotten riskier and more complex. The team shorted U.S. Treasuries from 2016 to early 2020 that led to a negative overall duration, stuck with ample concentration among its emerging-markets local bond positions, and made significant shifts in its largest currency exposures going into 2020. The strategy has been known to make up ground in a hurry, but the extreme volatility coupled with the specter of persistent outflows raise the probability of liquidity trouble.

MFS Corporate Bond (MBDIX) had five of its six share classes drop to Neutral because of manager changes. Robert Persons retired in June 2021 after 16 years at the helm. Alex Mackey, a manager since 2017, and Henry Peabody, who joined MFS in 2019, stepped in. The fund's People Pillar rating dropped to Average as Peabody, who has assumed primary responsibility for the portfolio's overall positioning, and Mackey prove themselves.

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