Reverse Alchemy

Management changes, strategy tweaks, and fee hikes or cuts can all make or break a fund's Morningstar Analyst Rating. That's evident in this latest batch of significant ratings changes and initiations, starting with a dramatic manager transition at a high-profile--and once highly rated--fund.              

People Problems
 T. Rowe Price Health Sciences' (PRHSX) condition isn't critical, but it may be serious. It's bad enough that Kris Jenner, who had managed the fund for 13 years, left this month, but two experienced analysts went with him. T. Rowe has many fine, experienced people capable of stepping in, including Taymour Tamaddon, who is taking over as manager after serving as an analyst on the health sciences team for nine years. Still, there's no telling if Tamaddon will prove as good as his predecessor and former colleague. During the Jenner years, the fund's 300% cumulative gain more than doubled the 148% rise of the average health-care fund and the 98% advance of the Dow Jones U.S. Health Care Index. The fund's rating dropped from Gold to Neutral after the departures because "it's unclear how well Tamaddon will execute the fund's process with a reduced team," according to Morningstar fund analyst Flynn Murphy.

Process Improvement
 Western Asset Intermediate-Term Municipals (SBLTX) got an upgrade from Neutral to Bronze for toning it down a bit. The fund was prone to wide relative performance swings and average duration changes during the tenure of former manager Joe Deane, who left for PIMCO in July 2011. Since then, current managers Rob Amodeo and David Fare have limited the fund's use of Treasury futures and are relying on cash bond holdings to take interest-rate and yield-curve positions. That could make the fund's duration and performance less variable. It also means the fund will rely more on its credit research and sector calls, which isn't a bad thing since Amodeo, Fare, and their team have shown skill in this area.

Fresh Appraisal
Not much has changed at  T. Rowe Price New Income (PRCIX). It has had the same manager for more than a decade and follows the same relatively staid fixed-income strategy as it always has. Recently, however, Morningstar bond fund analysts have gained a better appreciation for T. Rowe's efforts to bolster risk controls for this and other fixed-income funds in its stable. Morningstar fund analyst Shannon Kirwin upped the fund's rating from Bronze to Silver. "For bond investors looking to keep a lid on drama, this affordable option is worth considering," Kirwin wrote

Price Hike
AllianceBernstein Discovery Value's (ABASX) fees went up, so its rating went down. Morningstar analyst David Falkof dropped the fund from Bronze to Neutral after AllianceBernstein lifted a fee cap that had kept expenses on all share classes below average for funds in similar distribution channels since 2005. The fund's expenses now are middling for broker-sold funds. The small/mid-cap, deep-value fund has surrendered a key advantage that makes it harder for its often volatile deep-value approach to succeed over the long term. "While the fund's approach and management team has been steady, its now less-attractive fees pose a higher hurdle for outperforming peers on a risk-adjusted basis," Falkof wrote.

Expensive but Inimitable
Some observers might notice that Morningstar recently published a new Silver rating for another mid-cap value fund with expense issues,  Delafield . True, the fund's 1.25% expense ratio is above average for a no-load mid-cap fund. That's certainly a strike against it, but the fund scores well in other areas, especially on people, process, and performance. Managers Dennis Delafield and Vince Sellecchia have one of the longest and most successful track records in the mid-value category. They've been at it for about 20 years, gaining more than 12% annualized from Nov. 19, 1993, through Feb. 22, 2013, while its average category peer gained 9.8% and the Russell Midcap Value Index advanced 11%. And they've done it with a hard-to-replicate approach that focuses mostly on economically sensitive industrial and materials stocks that look cheap because of failed acquisitions, misguided strategies, and management upheaval. Investing in turnarounds is just asking for volatility, and this fund certainly has had its share, but Delafield has compensated investors with the fortitude to stick with it.