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Fund Spy: Morningstar Medalist Edition

A Surge of New Ratings to Start the Summer

A busy month full of new funds.

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In June, Morningstar manager research analysts affirmed the Morningstar Analyst Ratings of 74 funds and one target-date series; downgraded the ratings of four funds; placed one target-date series under review; and assigned new ratings to 83 funds. Below are some of June’s highlights, followed by the full list of ratings changes.

Downgrades
 Lord Abbett Developing Growth (LAGWX) was downgraded to a Neutral rating from Silver due to strategy deviations, and high portfolio and personnel turnover.

Lead portfolio manager Tom O’Halloran, who has led the fund since 2003, employs an aggressive, high-growth strategy that has historically favored firms with strong revenue and earnings growth. However, O’Halloran and his team set aside this preference in 2016, adding basic materials stocks in anticipation of increased federal infrastructure spending. These unusual picks haven’t panned out, and the small-growth Morningstar Category fund posted a dismal 2016 return which ranked in the bottom decile of peers, following another bottom-decile result in 2015.

Beyond underperformance, the analyst team has experienced turnover as some longtime analysts left. Three of the seven team members have joined since 2014, resulting in shuffled sector coverage. While the heavy-trading fund, which often posts an annual turnover near or north of 200%, has fared better in 2017, its current investment team needs to prove itself.

New Ratings
 LSV Value Equity (LSVEX) earns a Silver rating due to its time-tested approach and strong supporting research staff. Led by firm co-founder Josef Lakonishok, LSV’s 11-member investment team averages over 13 years with the firm. The team’s process features a distinct blend of quantitative and fundamental investing, underpinned by years of both academic and practical experience. A quant model attempts to identify unpopular stocks selling at discounted valuations, preferring companies with strong earnings, cash flows, and dividends relative to their price. The team fundamentally reviews names identified by the model and takes a long-term view relative to other quantitative funds, with turnover often below 20% annually. The team has honed its approach since the fund’s 1999 inception, and is reticent to chase quant fads such as scraping social media posts. The fund tends to be more volatile than large-value category peers, in part due to its higher-than-average exposure to small- and mid-cap stocks, but still maintains a performance edge since inception.

 Wells Fargo Core Bond (MNTRX) earns a Silver rating due to skillful execution of its strategy and avoiding areas in which the team lacks an edge. Managers Tom O’Connor and Troy Ludgood of Wells Fargo investment boutique Montgomery Fixed Income have led the fund since the early 2000s, and head a 23-member investment team. The managers maintain a rate- and yield-curve-neutral approach, pegging to the Bloomberg Barclays U.S. Aggregate Bond Index, and aim to add value through sector and security selection. This approach, which also limits the portfolio’s high-yield exposure to 5% of assets, can leave the fund vulnerable in rising rate environments due to its duration neutrality and in strong high-yield rallies such as 2016. Still, the fund has performed well during its managers’ tenure, beating most of its intermediate-term bond peers while maintaining below-average levels of volatility. This performance pattern has proven consistent: The fund has never finished a calendar year in the bottom quartile of the category during its managers’ tenure. It’s also reasonably priced.

 Baron Emerging Markets (BEXIX) receives a Bronze rating due to its distinct investment process and below-average expenses. Michael Kass has managed the fund since its year-end 2010 inception and seeks entrepreneurial-minded emerging-markets companies whose stock prices can double over three to five years. Kass is supported by five dedicated research analysts here and at  Baron International Growth (BIGFX), which he has led since its 2008 inception, and relies on the expertise of Baron’s broader research teams, which includes 21 additional analysts. He views investment ideas through broad economic themes, such as policy reform and rising labor costs, and is comfortable with the fund looking different from its MSCI Emerging Markets IMI Growth benchmark. Indeed, the fund’s average market cap is nearly half that of the index. Results since the fund’s inception are strong, buoyed at times by a large cash stake and reliance on a more-conservative approach that favors competitive advantages and steady fundamentals. This success hasn’t gone unnoticed: The fund’s asset base has grown considerably in recent years, which could present a challenge.

 Dodge & Cox Global Bond (DODLX) features a patient and disciplined strategy and low fees, meriting a Bronze rating. Launched in 2014, the fund is the firm’s sixth offering and is built on the same foundations as Gold-rated  Dodge & Cox Income (DODIX). Led by a six-member global fixed income investment committee, the fund has a three- to five-year investment horizon and employs the firm’s hallmark bottom-up research. The fund is concentrated in 50-80 issuers with a geographic and sector profile that can be quite different from its Bloomberg Barclays Global Aggregate Index benchmark and world-bond category peers, such as large allocations to corporate and emerging-markets bonds. Performance since the fund’s May 2014 inception is decent, but volatile at times, as the fund’s large allocation to credit means it tends to outperform during risk-on periods, but lag when credit underperforms. Low expenses, another Dodge & Cox hallmark, add to the fund’s appeal.



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