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Fund Spy: Morningstar Medalist Edition

Muni Strategies at American Funds Enjoyed Team Upgrades

Highlights of the downgrades and upgrades this month.

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Morningstar updated the Analyst Ratings for 648 fund share classes, exchange-traded funds, separately managed accounts, collective investment trusts, and model portfolios in May 2022. Of these, 550 maintained their prior rating, 23 were upgraded, 21 were downgraded, 13 were new to coverage, and 41 were placed Under Review owing to material changes, such as a pending subadvisor change.

Looking through share classes and vehicles to underlying strategies, Morningstar issued 154 Analyst Ratings in May. Three of these were new to coverage while the rest had at least one investment vehicle with a prior rating.

Below are some highlights of the downgrades and upgrades.

Downgrades

BlackRock Emerging Markets(MADCX) asset growth over the past year raises enough concern to drop the Process rating of this U.S. vehicle to Average from Above Average. Lead manager Gordon Fraser’s prior execution of the strategy notwithstanding, the number of holdings in the strategy’s U.S. version has significantly increased as Fraser has adopted a basket approach to stock-picking to accommodate asset growth. The number of holdings grew to 123 by April 2022 from around 80 in mid-2021, whereas the strategy’s non-U.S. vehicles maintained their historical range of 70-80 holdings. It’s not clear that Fraser’s basket approach for the U.S. fund will prove as effective as concentrating on his best ideas.

Oakmark Global Select (OAKWX) remains a strong offering for global equity exposure, but lower conviction in the investment approach drops the Process rating to Above Average from High, and in turn the Analyst Rating to Bronze from Silver across all share classes. A solid management team continues to employ a disciplined, bottom-up research here. And while the team has been unwavering in its commitment to this approach, it is a bold offering with few constraints at the portfolio-construction level. The end portfolio is very concentrated indeed, featuring roughly 20 best ideas from the firm’s U.S. and non-U.S. teams, and individual positions have at times exceeded 10% of assets. That concentration magnifies the portfolio’s bets, for better or worse. Overall, risk management considerations here explain why its Process rating is one notch lower than its more-diversified sibling, Oakmark Global (OANGX).

Upgrades

Increased confidence in American Funds Tax-Exempt Bond’s (AFTEX) managers and analysts resulted in a People Pillar rating upgrade to High from Above Average. The strategy's cheapest share classes now carry Analyst Ratings of Gold and Silver, while its more-expensive shares earned a Bronze or Neutral rating. The veteran team collaborates well through strong communication and organized succession planning. Capital Research has long taken a multimanager approach to running its strategies, which this team argues allows each of them to clearly express their views and helps ease the disruption of individual manager changes. Comanagers Karl Zeile, Chad Rach, and Courtney Wolf are each responsible for running roughly 25% of this portfolio, while a growing team of experienced analysts run the remainder. The continued evolution of the firm's risk-management team and analytical capabilities has strengthened this strategy's toolkit and helped bring more cohesion to the group.

American High-Income Municipal Bond Fund’s (AMHIX) People Pillar rating was upgraded to High from Above Average for similar reasons. The strategy's cheapest share classes now carry an Analyst Rating of Silver, while its more-expensive shares earn a Bronze rating. Similar to the tack taken with American Funds Tax-Exempt Bond, comanagers Chad Rach, Jerry Solomon, and Courtney Wolf are each responsible for running roughly 25% of this portfolio, while a team of analysts manage the remainder. Wolf was named portfolio manager on this strategy in October 2021. She joined Capital Group in 2005 and served as a fixed-income investment analyst primarily covering municipal bonds in the airport and tobacco settlement sectors. While there have been some shifts in this team over the past several years, these two strategies remain in excellent hands.

Invesco Ultra Short Duration ETF’s (GSY) People Pillar rating was upgraded to Above Average from Average because of increased conviction in its management team. As a result, the ETF’s Analyst Rating was upgraded to Bronze from Neutral. This ultrashort strategy is managed by Invesco’s global liquidity franchise, which is led by CIO and head of global liquidity Laurie Brignac. The team inherited the portfolio through Invesco’s purchase of Guggenheim’s ETF business in 2018, but the managers here have decades of experience managing liquidity and ultrashort solutions, and they are further supported by the firm’s well-resourced and collaborative fixed-income group.

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