A Fistful of Downgrades

We have lowered our rating on five funds.

We took  Arbitrage Fund (ARBFX) down a peg to Bronze from Silver because of strategy and management changes. We still think it's a good choice as indicated by the Bronze rating, but there are some concerns. The fund had a growth spurt to $3 billion from $500 million in just three years, and it gave the fund a different profile. Management has moved toward large caps in order to find more liquidity. As a result, it has gone to just 13% small-cap exposure from 40%. As small caps were big contributors to the fund's success, that's a worry.

It has also gone overseas to find more deals to satisfy that asset growth; the fund is now about half foreign. Thus, it is in a spot where there is less of a track record. So far the record on that move is disappointing as two of its three misfires on mergers came from overseas.

Our view changed more dramatically at  Fidelity Floating Rate High Income (FFRHX), where manager Christine McConnell’s retirement is a real blow. Thus, we lowered the fund to Bronze from Gold because of concerns about changes in strategy and execution under new manager Eric Mollenhauer. While Mollenhauer has two decades of experience, we have only a two-year public record from  Fidelity Series Floating Rate High Income (FFHCX). On the plus side, he’s supported by a strong team of analysts.

We downgraded  Janus Global Research (JAWWX) to Bronze from Silver. The record at other Janus funds, including  Janus Research (JAMRX), shows that the quality of Janus' global research isn't all that strong, damping our enthusiasm for this analyst-driven fund. In addition, the fund just surged in assets after absorbing the $2.1 billion Janus Worldwide. That’s quite a boost for a fund that had a mere $300 million in assets.

We took  ASTON/Montag & Caldwell Growth (MCGFX) down one notch to Silver from Gold to reflect a downturn in performance and the growing likelihood that Ron Canakaris will hand over the reins. Canakaris is now in his fifth decade at the firm. We still like the fund a lot, but Canakaris is 68 and we don’t have much of a track record for his likely successors. They run a mid-cap fund with a small asset base that has middling results. On the plus side, the fund’s returns since its 1994 inception are still better than the S&P 500 and Russell 1000 Growth indexes and its process has not changed.

We also lowered  Clipper (CFIMX) to Silver from Gold as the focused version of Chris Davis and Ken Feinberg's strategy has added more to risk than rewards. Although the fund has respectable one- and three-year records, its five-year record is weak and the combination of a focused portfolio and financials bias gives us pause. On the positive side, Davis and Feinberg do have a strong record of nearly 20 years at Davis New York, and we expect the picture will continue to brighten, though it will be a bumpy ride.

For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.