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Fund Spy: Morningstar Medalist Edition

April Activity Features a Storm of New Fund Analyst Ratings

New ratings rule the month.

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In April, Morningstar Manager Research analysts upgraded the Morningstar Analyst Ratings of six mutual funds and one exchange-traded fund, downgraded nine mutual funds and one exchange-traded fund, affirmed ratings on 52 mutual funds, three target-date series, one target-risk series, and two ETFs, assigned new ratings to 25 mutual funds, one target-risk series, and five ETFs, and placed one target-date series under review. Below are some of April’s highlights, followed by the full list of ratings changes. 

 Ariel International (AINIX) was upgraded to Bronze from Neutral thanks to its solid risk-adjusted returns and prudent risk management approach. Portfolio manager Rupal Bhansali, who has led this fund since its December 2011 inception, places a heavy emphasis on businesses with strong franchises and sustainably high returns on capital. Bhansali seeks high-quality holdings, and as of December 2016, the  fund had the highest average return on assets and lowest debt/capital metrics in the foreign large-value Morningstar Category. Bhansali shows conviction versus the fund’s MSCI EAFE Index benchmark, with big overweightings in technology and telecom as of March 2017. The fund also hedges currency exposure at times, and its cash stake has drifted as high as 20%. Ariel cut fees by 12 basis points in November 2016, making the fund more cost-competitive.

 PIMCO Low Duration (PTLDX) has stabilized under managers Scott Mather and Jerome Schneider since the abrupt departure of Bill Gross in September 2014, as has the broader firm. PIMCO’s Parent rating was upgraded to Positive from Neutral, and this fund’s rating moved to Silver from Bronze. Mather and Schneider are supported by PIMCO’s large pool of portfolio managers and analysts and use the firm’s macroeconomic views to shape the fund’s strategy. Given concerns about the short end of the U.S. Treasury Yield curve, the managers have kept the fund’s duration short of its benchmark’s by nearly half a year. Since the management changes in 2014 through March 2017, the fund’s 1.2% annualized return lands just behind its distinct peer’s 1.3%, but the team’s cautious portfolio construction and abundant resources bode well for its future.

 BlackRock Basic Value (MABAX) was downgraded to Neutral from Bronze owing to manager and investment team changes. Lead manager Bart Geer, who had run this fund since coming to BlackRock from Putnam Investments in late 2012, has left as part of the restructuring of BlackRock’s active equity team. During his tenure, the fund’s annualized returns beat most large-value peers but lagged the Russell 1000 Value Index. Former comanager and analyst Carrie King has taken over alongside Joe Wolfe, a BlackRock employee since 2012 who helped Geer build the quantitative screens he used as part of his process. King and Wolfe will rely on an approach that combines quantitative and fundamental techniques, and a bolstered research team built around the team managing  BlackRock Equity Dividend (MADVX). Although King and Wolfe have roots here, it remains to be seen how they will make the fund and its process their own.  

New Ratings
 Columbia High Yield Bond (INEAX) earns a Bronze rating for its stable, experienced management team and structured, repeatable process. Lead manager Jennifer Ponce de Leon took over the fund in early 2010 following the retirement of longtime manager Scott Schroepfer. and works alongside comanager Brian Lavin. They combine a bottom-up selection process with a tactical macro overlay to manage extreme market conditions and credit cycle inflections. The duo places a large emphasis on risk management and consider diversification by credit tier, industry, and issuer key in building a balanced portfolio that can weather occasional sector sell-offs. Since Ponce de Leon assumed control, the fund’s 7.8% annualized return through April 2017 beat more than 75% of its high-yield peers, through a combination of lower volatility and strong security selection.

 Virtus Small-Cap Sustainable Growth (PXSGX) features a disciplined management team that has used a quality-oriented process to achieve superior results, earning it a Bronze rating. Comanagers Todd Beiley and Jon Christensen have run the fund since 2008 and 2009, respectively, and have been on the investment team at subadvisor Kayne Anderson Rudnick since the early 2000s. Alongside five team members, they seek out high-quality small-cap companies with strong growth prospects and less business and balance-sheet risk than peers. The managers construct the portfolio with conviction, owning around 30 stocks with nearly half of the fund’s assets in the top 10 positions. Since Beiley came aboard in April 2008 through April 2017, the fund’s 12.7% annualized gain soundly beats its Russell 2000 Growth benchmark and average small-growth peer and does so on a risk-adjusted basis as well. The drawback to this fund, which has seen strong inflows in recent quarters, are its fees, considered high relative to small-cap peers'.

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