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Fund Spy: Morningstar Medalist Edition

November Ratings Activity Includes a Pair of Upgrades

Seven other Morningstar Medalists were downgraded, and three funds were placed under review.

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Morningstar Manager Research analysts downgraded seven Morningstar Medalists in November--five of them losing their medalist status with Morningstar Analyst Ratings of Neutral--and upgraded two Analyst Ratings to Silver from Bronze. We also rated eight funds for the first time and placed three funds under review. 

In addition, analysts affirmed ratings for 58 funds and four target-date series. In total, Morningstar Analyst Rating activity in November 2015 included 78 U.S. funds and four target-date series. Some of the notable changes are highlighted in this article; a complete list can be found in the table below.

Upgrades
 Fidelity Short-Term Bond (FSHBX) saw its Morningstar Analyst Rating upgraded to Silver from Bronze thanks to a conservative bent paired with thoughtful sector allocation and rigorous security selection, which has contributed to compelling risk-adjusted performance since lead manager Rob Galusza and comanager Robin Foley took over in 2008. The pair spent nearly two decades working together in a prior stint at Fidelity, where they helped manage short-term and stable-value portfolios for the firm's insurance company and institutional clients. Muted risk-taking within the fund means investors shouldn't expect runaway performance, but it offers better downside protection in more-challenging market environments. The conservative approach is reflected in the fund's higher allocation to government and AAA rated bonds relative to short-term bond peers, as well as a shorter duration.

 T. Rowe Price International Discovery (PRIDX) has been upgraded to Silver from Bronze, because of its exceptionally seasoned lead manager, the ongoing merits of its strategy, and other enduring strengths, including an attractive expense ratio and T. Rowe Price's shareholder-friendly qualities. This fund's strategy is quite sound and appealing. Lead manager Justin Thomson and his comanagers allow their stock selection to lead to moderate sector and country overweightings, pay ample attention to emerging-markets equites, and focus well down the market-cap ladder as they pursue firms with compelling business models and the ability to generate returns above the cost of capital. But they also carefully consider valuations, spread the portfolio pretty evenly across 200-250 names, and move at a measured pace. Thus, this fund provides plenty of upside potential and complements many foreign large-cap funds well without taking on excessive risk. Thomson and his team have executed their discipline well in a variety of investment climates over the years, including a choppy 2015. This fund, therefore, boasts superior short-, mid-, and long-term total and risk-adjusted returns.

Downgrades
 Fidelity Leveraged Company Stock (FLVCX) has been downgraded to Bronze from Silver because of its extreme risk profile that makes the fund difficult to own well. For example, during the past decade through November 2015, the fund's asset-weighted returns suggest that investors have realized less than half of its time-weighted total return because they have bought and sold the fund at the wrong times. The aggressive strategy that the fund employs--trafficking in debt-laden stocks that tend to be very volatile--is challenging to execute. Even when veteran manager Thomas Soviero gets his picks right, it can still be quite a bumpy ride, as he often buys stocks with debt/equity ratios in excess of 50% and below-investment-grade credit ratings.

The Analyst Rating for  Royce Premier (RYPRX) also has been downgraded to Bronze from Silver to reflect poor performance during the past few years, in part because of poor execution of a time-tested process that has served investors well over the long term. While it has a strong long-term record, the fund has struggled during the past few years. This was partially due to its overweighting of the basic-materials and energy sectors, which a previous comanager, Whitney George, favored. However, lead manager Chuck Royce, who currently has sole discretion over this portfolio, has trimmed those stakes following George's departure. The fund, which tries to capitalize on Royce & Associates' best ideas, is benchmark-agnostic, and its sector weightings and performance can deviate significantly from the Russell 2000 Index's. Royce collaborates with Lauren Romeo and Steven McBoyle to try to identify highly profitable, conservatively capitalized companies in which the firm has the highest conviction.

 Prudential Jennison Equity Income (AGOCX) has been going through a tough time in the past few years, prompting a downgrade to Neutral from Bronze. After trailing the large-blend Morningstar Category and the S&P 500 benchmark each year from 2012 through 2014, the fund has continued to trail the category in 2015, suffering losses amid sharp market volatility. The fund's focus on large firms with predictable, sustainable cash flows was a big reason why the fund underperformed in the 2012-14 bull market, when low interest rates fueled big gains in riskier, lower-quality stocks. In 2015, the broader market has stumbled, but this fund has still trailed as its energy infrastructure holdings got hammered by falling oil prices. It did post strong numbers in the first few years after current managers Shaun Hong and Bobby Edemeka took over in January 2007 and has easily beaten the large-blend category over the managers' entire tenure. But its earlier success came when it was far smaller, mostly around $100 million in assets versus today's $4.5 billion, and had more of a mid-cap value tilt. The managers have yet to show that they can outperform consistently at the fund's current size and strategy.

 GoodHaven (GOODX) hasn't justified the leap of faith required by its aggressive strategy, leading to a downgrade of its rating to Neutral from Bronze. This fund, which launched in April 2011, got off to a great start, ranking in the top 5% of funds in its category in calendar-year 2012. But since then, the fund's results have plummeted--its return since inception trails its benchmark, the Russell 3000 Value Index, by a significant margin. The fund's struggles owe partly to its strategy being out of favor, but more so to stock-specific issues. Its managers tend to like turnaround stories, which usually carry significant business risk and can take time to play out. Portfolio managers Keith Trauner and Larry Pitkowsky are experienced investors, and they were part of Fairholme's team during a nine-year stretch of excellent performance. Yet, this fund constitutes the only public record for the two of them. Returns may well improve, but given the challenges of their approach and struggles thus far, caution is warranted.


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.

John Gabriel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.