Manager Changes Spur Ratings Downgrades in June

We changed 15 Morningstar Analyst Ratings in June and initiated 10 more. We downgraded six funds, upgraded four, put three funds under review, and rated two funds formerly under review.

Upgrades
We upgraded two J.P. Morgan funds: We raised  JPMorgan Mid Cap Value (FLMVX) to Gold from Silver and  JPMorgan Equity Income (OIEIX) to Silver from Bronze. While downgrades often happen due to one big event, upgrades are more about the steady ascent of a good fund. Continued stability in analyst and manager ranks, strong performance, and declining fees are among the factors that gradually make a fund look better. That's the case for these two J.P. Morgan funds.

A deeper dive on equity-income funds highlighted JPMorgan Equity Income's strengths relative to peers and equity income benchmarks. Since 2004, lead manager Clare Hart has outperformed both on a return and risk-adjusted return basis.

At the closed JPMorgan Mid Cap Value, lead manager Jonathan Simon boasts a strong record going back to 1997. The fund has quietly proved exceptional. Simon doesn't go for a focused portfolio; the fund owns about 100 names and rarely allows any to grow to more than 2% of assets. Yet his emphasis on undervalued but high-quality companies has led to excellent results. Comanagers Lawrence Playford and Gloria Fu, whose tenures date to 2004 and 2006, respectively, help Simon.

American Funds has made steady improvement to the way it runs municipal-bond funds. That led us to raise  American Funds Tax-Exempt Bond (AFTEX) to Bronze from Neutral. The firm has built a portfolio strategy group that sets bands for duration, yield-curve positioning, and credit positions, which the managers then implement. This new structure prevents managers from canceling each other out or inadvertently doubling down on a bet. Now they can focus on issue selection, and that's a good thing.

We raised  Goldman Sachs Small Cap Value (GSSMX) to Bronze from Neutral because things have settled down there. Goldman Sachs' Parent pillar moved to Neutral from Negative and manager turnover slowed down, which helped this fund's cause. Although the fund has had some departures, managers Sally Pope Davis and Rob Crystal have been named managers since 2006 and they follow a steady, repeatable process.

Manager Changes Spur Downgrades
There are two big names on our downgrade list. We lowered  T. Rowe Price Equity Income (PRFDX) to Bronze from Gold in response to news that Brian Rogers will step down in October 2015. He will be replaced by John Linehan, who ran  T. Rowe Price Value (TRVLX) from 2003 to 2009. From 2009 to now, he's served as head of T. Rowe's U.S. equity team.

Our ratings are focused on long-term risk-adjusted results, so we see this as a fund where you're mostly getting Linehan if you buy and hold for 10 years. Thus, Linehan's record is more important, and his six-year record isn't nearly as convincing as Rogers' 28-year record.

The good news is that Linehan did outperform the benchmark in his time at T. Rowe Price Value. However, he mainly added value in sectors that are not the bread and butter of equity-income funds. It still looks like a good fund, but there's less certainty under Linehan--hence, the Bronze rating.

A manager change prompted us to lower  Third Avenue Value (TAVFX) to Neutral from Bronze. Robert Rewey III has replaced Ian Lapey. Rewey comes to Third Avenue from Cramer Rosenthal McGlynn. However, he was one of several comanagers there, so he doesn't have much of a track record.

In addition, Third Avenue has suffered a number of departures recently, as well as poor performance in most of its funds. We lowered its Parent rating to Neutral earlier in the year, and Neutral fits this fund's prospects as well.

Continuing with the manager departure theme, we lowered  FPA Perennial to Silver from Gold because of Steve Geist's retirement. We have a little more faith in the remaining management team. First, Eric Ende remains at the fund he has comanaged with strong results since August 1999.

Second, Greg Herr was named comanager in August 2013 after six years as an analyst at the firm. So, we feel the fund has two good managers in place. We also like the fund's process of looking for steady growth names with little debt whose shares trade at modest prices. With a small asset base, the fund has plenty of flexibility to boot.

We also downgraded  Invesco Charter (CHTRX) and  Invesco Mid Cap Core Equity to Neutral from Bronze, due to management team changes. In April, comanager Tyler Dann left and Mid Cap Core took comanager Doug Asiello off the management squad. In addition, six team members are moving from San Francisco to Atlanta, but team leader Ron Sloan and analyst Josh Goldstein are staying behind. In short, there's a lot of change going on and there's too much up in the air for these funds to remain as medalists.

At  MainStay Large Cap Growth (MLAAX), asset bloat as well as personnel changes spurred a downgrade to Neutral from Bronze. Assets have surged since New York Life acquired the fund, giving subadvisor Winslow Capital Management a hefty $36 billion to run in the strategy. Coincident with that growth, performance has trailed off.

That's not an ideal time for the team to lose people. Founder Clark Winslow is dialing down his workload and stepped down from the CIO post in 2013. Comanager Bart Wear also retired in 2013. On the plus side, they've added two analysts, but they can't match the experience of Winslow and Wear.

Ivy Asset Strategy Rated Neutral
We put the formerly Bronze-rated  Ivy Asset Strategy (WASAX) and  Waddell & Reed Asset Strategy (UNASX) under review when they announced comanager Ryan Caldwell's departure in May. Caldwell played an important role at the funds, but Waddell initially said he would serve as a consultant to the funds even though he was taking a job with another company that was not an asset manager.

While his contributions would be welcome, it seemed like a potential compliance nightmare as he would naturally be privy to information that might not be public and he might also have conflicts of interest if he worked for a company owned by the funds. Now Waddell says it will be a clean break--so that's cleared up--but the fund still lost an important manager. Thus, we are rating the funds Neutral.

Under Review
Manager departures led us to put  Calamos Market Neutral Income (CVSIX),  MainStay High Yield Corporate Bond (MHCAX), and  AllianceBernstein Discovery Value (ABYSX) under review while we gather information on where the funds are headed.

Update
We've updated our rating on  Franklin Federal Intermediate-Term Tax Free Income (FKITX). The fund's rating had expired--ratings expire if not updated within 12 months. Managers John Pomeroy and James Conn keep a pretty tight lid on credit and interest-rate risk but still find some decent yields to keep investors going. Franklin has a deep analyst team that gives us confidence in this Silver-rated fund's prospects.

You can see the rest of our new or updated ratings in the table below.

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.