Billion-Dollar Funds With Negative Ratings

The lowest Morningstar Analyst Rating a fund can earn is Negative. (The others are Gold, Silver, Bronze, and Neutral.) Negative-rated funds are those that we believe are likely to underperform their peers and benchmark over a full market cycle because of fundamental flaws, which can include an inexperienced team, an unsound strategy, high fees, and issues at the parent company. Below, we highlight the largest funds that earn Negative Analyst Ratings (all have more than $1 billion in assets) and why we think their prospects are dim.

Ivy High Income WRHIX ($8.3 billion)

This fund has seen two successive lead managers depart in the past 15 months. In November 2013, Bryan Krug, who had steered the fund to excellent results since taking the helm in February 2006, departed to start a new team at Artisan. William Nelson (then the manager of sister fund Waddell & Reed High Income UNHIX) took over, but he was fired in July 2014 for reasons unrelated to portfolio management duties. The latest skipper is Chad Gunther, who had served as an assistant manager at this fund since 2008. He's backed by seven analysts, two of whom were just hired in 2014. (This compares unfavorably to many competitors.) In addition, the analysts are responsible for risk management, no small task given the fund's penchant for owning lower-rated bonds even within the high-yield universe. Because of the team's modest resources, spate of manager turnover, and the hefty risks it takes, the fund earns a Negative score for the People pillar.

Making matters worse, the team must grapple with a large asset base--the fund grew quickly under Krug as investors took notice of its record--and now, large outflows because of the team's turmoil. Investors pulled a net $1.9 billion from the fund in 2014. Such outflows can hinder performance given the less-liquid securities held by the fund. Departing talent and inadequate resources at the overall firm have led to a Negative rating for its Parent pillar as well.

Russell LifePoints Balanced Strategy RBLEX ($3.5 billion) and Russell LifePoints Growth Strategy RALEX ($2.2 billion)

These two funds are part of a series that also includes the smaller

The funds are arguably over-diversified. Each one invests in roughly a dozen underlying funds, which in turn employ three to 12 subadvisors each. The managers at Russell who oversee the underlying funds have also hired and fired subadvisors at a fairly rapid clip. And despite the sprawling portfolios of the three static-allocation funds, they've been more volatile than their competitors. Thus, the Balanced and Growth funds have trailed more than three quarters of their respective Morningstar Category peers on a risk-adjusted basis over the trailing decade through the end of 2014. (Moderate lags 62% of its peers on this basis.) All three earn a Negative for Performance, as well as for Price because of expense ratios well above those of comparable offerings.

State Farm LifePath 2020 SAWAX ($2.0 billion), State Farm LifePath 2030 SAYAX ($1.9 billion), State Farm LifePath 2040 SAUAX ($1.4 billion), and State Farm LifePath Retirement SLRAX

($1.2 billion)

This target-date series (which also includes the smaller

The funds have seen portfolio changes in recent years, including the addition of some actively managed funds with respected managers that could cause performance to perk up. But costs remain a significant obstacle.

Templeton Developing Markets TEDMX ($1.6 billion)

One of this fund's managers, Mark Mobius, is a pioneer in emerging-markets investing and has been at the helm since the fund's 1991 inception. Nevertheless, the fund has failed to deliver. It trailed more than 70% of its diversified emerging-markets peers over the three-, five-, 10-, and 15-year periods ended Dec. 31, 2014. Errant stock selection coupled with huge bets on sectors and regions and forays into frontier markets have torpedoed the fund's results. Furthermore, Mobius doesn't manage the fund on a day-to-day basis; he's a named manager on roughly a dozen funds in all and spends much of his time overseeing the investment team and the process. (Veteran managers Tom Wu and Dennis Lim do much of the day-to-day work here.) Although the team modified its portfolio-construction process in 2008 to reduce risk following a painful 54% loss in 2008, performance has not picked up since then.

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.