More Ups and Downs

Morningstar active fund analysts recently upgraded the Morningstar Analyst Rating of one fund and downgraded seven others.

Familiarity did not breed contempt for  Fidelity Large Cap Stock's (FLCSX) manager Matthew Fruhan. We first assigned the fund an Analyst Rating of Bronze in 2011; it had its merits but did not warrant a better rating because this was the first non-sector fund Fruhan had managed for Fidelity. He's since proven himself worthy of a higher assessment. After roughly three years of interviewing and meeting with Fruhan, and analyzing his process, portfolio, and performance, senior analyst Janet Yang was comfortable with raising the fund's Analyst Rating to Silver from Bronze. In the nearly eight years Fruhan has run this fund he has demonstrated that he's an able, growth-leaning investor with a bit of a contrarian streak. The fund's 8.5% annualized gain from Fruhan's May 2005 start through July 9, 2013, beats the 5.9% advance of the typical large-blend fund and the 6.7% rise of the S&P 500 Index.

A recent "own goal" contributed to  Hussman Strategic Total Return's (HSTRX) downgrade to Neutral from Bronze. Perennially bearish manager John Hussman's large position in gold mining stocks--taken as an inflation hedge and because Hussman has long viewed them has cheap relative to the price of gold--has not only prevented this conservative-allocation fund from participating in the recent rally, but also caused it to fall in value. Hussman has reduced the fund's gold mining stake, but the recent bout of poor performance has left the fund with a middling long-term record. The fund has usually kept 80% of assets in U.S. government bonds and cash, and 20% in mining, energy, and utility stocks. It's done about as well as a similar mix of S&P 500 and Barclays U.S. Aggregate index-tracking funds or exchange-traded funds.

 Oppenheimer Capital Appreciation (OPTIX) lost its Bronze Analyst Rating when it lost its manager. Lead manager Julie Van Cleave left at the end of May after just three rather desultory years at the helm. Mike Kotlarz, the fund's tech stock analyst who was named a comanager in 2012, remains. He'll use the same quality-focused strategy Van Cleave did, but he reportedly will also try to be more tactical, making modest sector bets based, in part, on macroeconomic factors. In short, this is has been a disappointing fund that still has to prove itself under new management and a slightly different strategy.

Morningstar moved  Longleaf Partners' (LLPFX) Analyst Rating to Silver from Gold, but not because it's been embroiled in several high-profile corporate battles with the likes of  Dell ,  Chesapeake Energy , and Olympus (OCPNY). The fund's focused, contrarian, deep value, long-term approach remains impressive, but it's imperfect. It has achieved great results over the long term but has likely induced shock and indigestion over shorter periods. As senior analyst Gregg Wolper wrote, “Volatility and occasional misfires in top holdings result in a Morningstar Analyst Rating of Silver rather than Gold.”

A manager promotion led to a ratings demotion at  T. Rowe Price Media & Telecommunications (PRMTX). Morningstar changed the fund's Analyst Rating to Bronze from Silver after the firm tabbed manager Dan Martino to take over  T. Rowe Price New America Growth (PRWAX), replacing that fund's longtime manager Joe Milano. (That fund's Analyst Rating dropped to Neutral from Gold in May.) The Telecom fund is in decent hands. Martino will take until the end of September to make the transition, and his successor, Paul Greene, is a tenured member of the analyst pool that has supported the fund. Still, this is his first gig as a fund manager and he has some proving to do.

Matthews China (MCHFX) has struggled lately, but that's not why Morningstar moved its Analyst Rating to Silver from Gold. One year of poor returns is not that big a deal, especially for reasonably priced funds with proven expertise in a particular area, like this fund. Matthews is perhaps the most deeply resourced and experienced Asia-focused investing outfit our analysts are aware of. But this fund is still a single-country fund with limited competition. As Morningstar senior analyst Bill Rocco rated other country funds from this shop and elsewhere, he decided a Silver rating was more consistent.  Matthews India (MINDX), for example, gets a Silver, while  Matthews Japan (MJFOX) and  Matthews China Dividend (MCDFX) both get Bronze medals.

A changing of the guard led Morningstar to move  Leuthold Core Investment's (LCORX) Analyst Rating to Bronze from Silver and  Leuthold Asset Allocation's rating to Neutral from Bronze. Firm founder Steve Leuthold has stepped aside, and the firm has suffered other personnel losses, such as the 2012 departure of stock selection head Jim Floyd. That's led to some subtle changes, and their long-term ramifications are unclear. Leuthold Asset Allocation, for example, has a new manager, Eric Weigel, who is implementing new quantitative models and making more, smaller asset-allocation shifts that could increase turnover.

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For a list of the exchange-traded funds we cover, click here.
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