A Target-Date Series Diversifies Its Way to a Medal

Most of the Morningstar Analyst Ratings changes since the end of July came in one fell swoop.

The Analyst Ratings for the entire Principal LifeTime target-date retirement series--about a dozen funds in total--went to Bronze from Neutral. Sure, recent performance has been strong because of a higher-than-average equity weighting across the lineup. It was the series' unique and thoughtful diversification, though, that pushed it into Medalist territory, wrote Morningstar analyst Jeff Holt. Principal has tossed into the mix some institutional-grade asset classes that are unusual for target-date funds, such as timber, master limited partnerships, infrastructure, floating-rate debt, commodities, and long-short strategies. The LifeTime funds access those exposures via an array of hand-picked subadvisors running some of the series' component funds-- Principal Diversified Real Asset ,  Principal Global Diversified Income (PGBAX), and Principal Global Multi-Strategy .

 TIAA-CREF Growth & Income (TIGRX) also jumped to Bronze from Neutral after Morningstar analyst Gretchen Rupp took a fresh look at the fund. The fund has looked better as manager Susan Kempler's record has lengthened and strengthened. In Kempler's nearly 10 years in charge, the fund has consistently beaten its large-growth peers and benchmarks, while being sensitive to controlling downside risk, Rupp wrote. Kempler leans toward quality, resists the temptation to chase momentum, and trims assiduously when valuations swell. 

 Franklin Flex Cap Growth dropped to Neutral from Bronze because in the decade or so since it dropped its regional focus and gradually started moving up the capitalization ladder, its performance and stock-picking haven't stood out. The fund used to own mostly California-based stocks and lean toward mid- and small caps until late 2003. Then in September 2003, the fund formally dropped its West Coast bias; in the years since, it also moved from the mid-cap growth Morningstar Category to large-cap growth. The fund has had its moments in the past 10 years, such as 2008 and 2013, but overall it has turned in mixed results, edging the typical large-growth fund since it changed its mandate but lagging the Russell 3000 Growth Index.

In the same fund family, on the other hand,  Franklin Growth (FKGRX) regained its Bronze rating after spending some time Under Review following the death of the fund's long-serving manager Jerry Palmieri. The fund had prepared, though. Successor Serena Perin Vinton had been working with Palmieri since her former large-growth fund merged with this one five years ago. There was a lot of overlap between Perin Vinton's old fund, Franklin Capital Growth, and this one, and since joining she has maintained much of Palmieri's patient, valuation-conscious style of investing in classic growth stocks.

 Ivy High Income (WRHIX) dropped to Negative from Neutral after being Under Review. This downgrade was due to a succession of abrupt manager changes at the fund, which is one of the more aggressive members of its peer group. Waddell & Reed, the fund's advisor, fired lead manager William Nelson in July 2014, replacing him with Chad Gunther, an analyst. It was the second such change in less than a year at the fund, which has a relatively small analyst staff. That and the fund's affinity for riskier bonds and loans--not to mention the firm's Negative Parent rating--argued for a Negative Analyst Rating, wrote Morningstar analyst Sumit Desai.

 Arden Alternative Strategies' decent start didn't prevent its Analyst Rating from dropping to Neutral from Bronze. Though the fund was an improvement on multialternative funds when it launched almost two years ago, increased competition from newer entries has eroded its advantages. Arden Alternative Strategies casts a wide net for hedge fund managers who run customized versions of their strategies for this fund and has turned in competitive returns since its November 2012 inception. But it has yet to be tested by a prolonged bear market as a mutual fund strategy, and it charges an exorbitant expense ratio, wrote Morningstar analyst Jason Kephart.

New Ratings
Two other alternative funds started out with Neutral ratings in August for similar reasons: They offer interesting strategies for high prices.  361 Managed Futures Strategy's follows a contrarian approach that's unique in a managed-futures category largely populated by funds that chase momentum trends. But it's young and untested by trying times, and its 1.89% price tag isn't cheap, even though it doesn't layer on management and performance fees as do most of its peers that use commodity trading advisors as subadvisors, wrote Morningstar analyst A.J. D'Asaro. Such fees prevent  Equinox Campbell Strategy (EBSAX) from a Medalist rating. It invests in a broadly diversified version of 26-year-old managed-futures strategy, but it too comes at a high price. Although the fund's net expense ratio is only 0.91%, it incurs other management, performance, and swap fees amounting to more than 2.40%.

Yes, one of the reasons  Vanguard Market Neutral (VMNIX) earned a Bronze rating was its low costs. But the fund has shown it's more than a low price tag, wrote Kephart. Its quantitative strategy has beaten the category average before and after fees since Vanguard's Quantitative Equity Group took over sole management of the fund from Axa Rosenberg in late 2010.

Finally,  Thornburg Limited Term Municipal's (LTMFX) straightforward approach to building a laddered portfolio, in which it divides assets between maturities ranging from one to 10 years, and reasonable fees make it a solid choice and worth a Morningstar Analyst Rating of Bronze, wrote Morningstar's Kiran Lilani.

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