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Investing Insights: New Fund Ratings, Dividend Showdown

We look at a nontraditional bond fund pick, real estate in retirement, and market-cap-weighted index funds on this week's episode.

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Jeremy Glaser: From Morningstar I'm Jeremy Glaser. I'm here today with Russ Kinnel, he's the editor of Morningstar's FundInvestor newsletter. We're going to look at some recent upgrades and downgrades that we've seen from our manager research team.

Russ, thanks for joining me.

Russ Kinnel: Glad to be here.

Glaser: You recently wrote a cover story for FundInvestor looking at some notable upgrades and downgrades for larger funds. We are going to talk about some of the upgrades first. The first is Fidelity Strategic Income. Why do we have a higher view or a better view of this fund today.

Kinnel: We put a Silver rating on this fund. It's actually new to coverage. This is our first rating. Fidelity has got a really deep team here. This is a fairly high-risk strategy. It's a multisector bond fund, meaning it's got a big chunk in high yield, emerging-markets, high-yield bank loans and then some more conservative holdings in addition. You've got high risk in terms of issue selection and then also you've got allocation because they are adjusting among those different types. That's a challenging job, but they've done a really good job of it, and we really think highly of the team, reasonable expenses. It's a high-risk fund, but we have a lot of confidence in the managers.

Glaser: Another upgrade was MFS Value, what changed there that improved our opinion?

Kinnel: Really this case is an example of a fund where really nothing has changed, it's more just growing confidence, growing evidence. Steve Gorham and team have been there for a while. We really like their value strategy. It's kind of value with a quality tilt, which means it gives a it little bit of a defensive nature. Hasn't been doing that well, really value relative to growth hasn't been doing that well. But if you look at the long term record it's really strong. MFS has a very deep analyst staff that we like. This is just a solid fund that's gradually growing in our esteem, really no actual change we can point to.

Glaser: Let's look at some downgrades then. The first is Oppenheimer Global. What's changed here or why are we less confident in this fund strategy?

Kinnel: Oppenheimer is really a firm where their international funds are pretty strong. But you see a lot of key-man risk, because typically you have one manager with a small analyst staff and not a lot of support behind them. In this case Rajeev Bhaman is going to retire next year, and the people coming in place of Bhaman are good but they don't have the track record. They really were not in charge before, and so we've taken the fund down to Neutral because of that. When an Oppenheimer manager retires its really a big deal. Of course the background there is a report that Oppenheimer maybe purchased by Invesco. Who knows if that would even affect the fund. The deal hasn't even been announced so again fairly speculative there, but we do know Rajeev Bhaman is retiring.

Glaser: Another downgrade is a Fidelity fund, Fidelity Puritan. What's happening here?

Kinnel: Ramin Arani is the manager at this fund, and he's really done a great job both in terms of he does the equity selection and the allocation selection. He's going to retire at the end of this year. His replacement is someone who we rate his equity fund Neutral, but also he doesn’t have any experience with allocation. The fund is mostly equities but also has some in fixed income, and the new manager will be in charge of deciding what that allocation is. Really a couple of question marks there. We don't expect the strategy to change but will the execution be as good, we have questions. This is why we have lowered it Neutral.

Glaser: Russ, thanks for the updates today.

Kinnel: Glad to be here.

Glaser: From Morningstar I'm Jeremy Glaser. Thanks for watching.


Christine Benz: Hi, I'm Christine Benz for What should you look for in your "forever home?" Joining me to discuss that question is Ilyce Glink. She is CEO of Best Money Moves, and she is also author of a new book, 100 Questions Every First-Time Home Buyer Should Ask.

Ilyce, thank you so much for being here.

Ilyce Glink: It's fun. Thank you.

Benz: You've got a new edition of your book that is geared toward first-time homebuyers, great questions that they should ask before pulling the trigger on a house. I want to talk about a core demographic for us on though, which is people who are getting close to retirement or in retirement. For a lot of people at that life stage, they are really thinking about, should I stay in this home or should I move to a different home where I maybe can stay throughout my retirement years. Let's talk about this idea of a "forever home." First of all, is there such a thing as a "forever" home?

Glink: I think the word "forever" is different for everybody. I have been in my house for almost 25 years, and to some people that is the forever home. It might be my forever home. But I also think that when you are starting to think about retiring, what we mean also by "forever home" is where is this going to be the place that you spend most of your retirement years.

One of the interesting things about the baby boomers is, they started doing re-retiring--the kids were gone, they retired, and they were like, oh, I'm going to move to the mountains. And then it was like, oh, five years later, I'm going to move to the beach. And then five years later, maybe their millennial children were giving them grandchildren--oh, and Susie is over here in Boston now. I'm going to going to go to Boston. Then Susie moved back home. 

You have to kind of think about where you are going to be for these 10 to 15 years before your kids give you grandchildren. Or if you don't have kids, where are your friends going. Because this is the other side of it. We are seeing that you may not have grandchildren or fewer grandchildren. Not all of your children may have children. You may have grand dogs like my neighbors do. But you may want to retire near where your friends are. We are seeing a real trend toward people retiring in clumps--they are all going to move out of this place, this town, and they are all going to go over here to this mountain town together, and then go over here to this villa.

It's interesting to look at what your future, your 25 or 30 years, looks like and make your list. Like I say for my first-time buyers in the book, make your wish list, make your reality check, what can't live without, and then take a look at your finances in retirement to see what you are going to be able to afford to do. That should be where the conversation begins--with a bottle of wine.

Benz: Good advice. Let's say someone is thinking that they actually want to try to stay put in one place. Let's talk about what sorts of things they should prioritize if they are thinking about staying in their home or thinking about relocating to a home that might be appropriate. What are some of the key features or amenities that they should be sure to consider? And of course, it's very individualistic?

Glink: It is but it isn't. When you move to the house that you raised your family in, school district is probably top of your list. It is for a lot of people. It should be if it isn't. But when you are thinking about your forever home, school districts are a lot less important. Not because your property isn't going to appreciate in value. If this is your forever home, you may say, I'm pretty much dying in this house. You don't care as much about that.

Benz: Appreciation.

Glink: You don't. I mean, you care because you always care. But you really don't care in terms of sending your children to the schools and what's happening there. As long as the school districts are fine, you really want to probably put healthcare and access to healthcare, access to public transportation, maybe it's single-level living, maybe those knees are going.

Benz: You want it to be safe?

Glink: You want to be safe. You want to have a community that's important to you, and that might be a 50-plus community, the sun communities that are out there. Pulte has done a wonderful job with those. Very, very popular, appreciating nicely for those who live there.

Benz: But some people don't want that at all. They want age diversity in their community.

Glink: Right. Or maybe you want to live near a downtown which is near culture, night life, and restaurants and you want to recapture what you used to do when you were single or dating your spouse or partner and be able to walk to everything and have this great city culture experience. Or maybe you want to live in the middle of an island far from everybody. 

But whatever is important to you, that has to go down on your wish list and then the reality check is, OK, but you do have to think about aging in place, what that means for the amenities in the house itself. Maybe it's extra wide doorways, the single-level living, an extra room for a possible caretaker down the line, extra room for maybe visiting children and grandchildren. Maybe it means you need to be on a bus line so that when you can't drive anymore, that easy access to transportation. So, all of those things should be thought about.

Benz: Those are all sort of quality of life considerations. Let's talk about the financial piece. Some people have significant home equity. Should downsizing be in their sights as a way to enlarge their investment portfolio while potentially getting them into a more size-appropriate home?

Glink: Size-appropriate is really interesting. The baby boomers have expanded their retirement income.

Benz: In retirement they are getting bigger.

Glink: They are getting bigger. They are buying bigger houses with more square footage. I'm not quite sure why. This whole downsizing thing is interesting. I do think at some point in time your forever home will be smaller than the 4,500-square-foot house you might be living in today. I do think that's what you are referring to, and I think that's appropriate. You just want less to take care of. 

For some people though, what they are doing is buying condos and then they just want to travel in retirement. A single-family house, there are a lot of things to worry about in terms of maintenance. It's why maintenance-free communities are so nice. Some people just want to be in a condo or an apartment, lock the door, and take off. I think that all of those are considerations as well.

The downsizing thing is interesting, because in terms of saving money, where you've been living the last 20 years--and this is actually a structural problem we are seeing in the real estate market right now--which is, not enough homes in the market. People like me whose kids are now just flown the nest, we should be downsizing or moving and leaving our homes. But it's so darn cheap to live there, Christine, the mortgage rate I have is so cheap, the amount I have to pay is so inexpensive. Yes, real estate taxes are high, but if I sold and moved to a smaller place, I probably pay the same or more and get less for my money. 

We are going to be seeing more people age in place simply because it's more advantageous. If that's going to be the case and you like where you live, then you have to think about renovating your home to accommodate the sort of creaky knee syndrome …

Benz: Your needs as they unfold.

Glink: Yes.

Benz: Ilyce, always great to get your insights. It's such an important topic. Thank you so much for being here.

Glink: Thank you.

Benz: Thanks for watching. I'm Christine Benz for


Michael Hodel: Telecom stocks are among the highest-yielding in the equity market. AT&T and Verizon, the big two U.S. telecom carriers, certainly fit that bill. AT&T's yield today is about 6%; Verizon's is about 4.5%.

Despite the fact that Verizon's yields are a little bit lower, we actually like that company and that stock better today. We think Verizon's focus on the core telecom business will position the firm well for the long term, especially if something unexpected happens in the telecom business. For example, the cable companies are potentially eyeing the wireless business and could get into the space at some point over the next several years. If wireless technology advances to the point that enables the cable companies to come in and disrupt the market, we think Verizon is positioning itself better for that to happen.

Whereas AT&T has chosen to go a different direction. They have diversified the business across media and television. We think that's pushed the firm in some areas where it's going to have more trouble competing over time. In addition, Verizon has a little bit stronger balance sheet than AT&T, which we think again, protects that dividend and gives the firm a little more stability. Whereas AT&T is going to be directing a lot of cash flow towards paying down debt over the next couple of years, Verizon, while also trying to pay down debt, won't have as much of a burden on its future cash flow coming from debt repayment as AT&T does.

So, despite the lower yield, we like Verizon here today. It's trading at about an 8% discount to our $58 fair value estimate, which is pretty similar to where AT&T is at. AT&T is trading at about a 9% discount to our $37 fair value estimate. Again, we prefer Verizon to AT&T, and we think it's an attractive play for dividend investors at the current market price.


Karin Anderson: MetWest Unconstrained Bond is a great choice in the nontraditional bond category. Like most funds in this group, it is absolute return-oriented and aims to downplay interest-rate risk. 

Most funds in that category have some combination of credit, perhaps a lot of high yield and a non-U.S. exposure and perhaps non-U.S. currency risk. This one is very focused on credit, and that's a good thing because that's what this team has really done well over the long term, both here and on their flagship fund, MetWest Total Return Bond. 

In this fund's case, they focus more on nonagencies, for example, and more on credit and high yield overall. That's led to greater returns over the long term. The team has also done a nice job navigating various stress periods for credit and rate risk since they launched this fund in 2011. 

That's why we think this makes this fund a very good choice in nontraditional bond.


Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. With a handful of large-cap names driving much of the market's return, many investors are wondering if market-cap-weighted indexes are at risk. I'm here with Ben Johnson, he is our director of global ETF research and also the editor of Morningstar's ETF newsletter, to explore this topic.

Ben, thanks for joining me.

Ben Johnson: Thanks for having me, Jeremy.

Glaser: Certainly it's eye-popping, when you look at index returns and see just a handful of names--Apple, Amazon really driving performance. Is this something that should concern index investors who have market-cap-weighted indexes?

Johnson: I don't think any one investing in a cap-weighted index fund should be at all concerned about what's going on right now with respect to exactly that: The number of firms that are driving the market in one direction or another, because this is a feature of market capitalization weighting and by no means is it in any way a bug. 

When you sign up for a cap-weighted index, you sign up for a very specific proposition, which is, I am going to own a specific universe of stocks--the S&P 500, the Russell 1000, the CRSP US Total Stock Market Index. I'm going to weight the stocks within that universe on the basis of their going market capitalization. I am outsourcing by way of owning a cap-weighted index fund all of the heavy lifting as it pertains to understanding these companies' fundamentals and subsequently setting their prices to other market participants. I'm taking my hands off the wheel, putting things on autopilot. And doing so because over the long stretches of time, the market generally gets it more right than wrong. And because it's very inexpensive to do so as measured by the fees that you'll be charged by investing in these funds, as measured by their turnover, as manifest in their tax efficiency.

Glaser: But how about valuations? When you see these big runups, you do wonder if they are justified. If these stocks are overvalued, if you're looking at--you hear some people describe it like the tech bubble again. Is that an apt comparison?

Johnson: Absolutely. So, that's not to say, going back to what I said before, is that along these long stretches of time you won't be nipped by bouts of mania, bouts of panic. Certainly the mania of all mania that we've seen, at least in recent history, was the tech bubble. That was a period of time where, if you look at the S&P 500, in particular, it took in 1999, 33 of the largest S&P 500 stocks to soak up 50% of the value of that index. So there is a huge degree of concentration within the index, at the security level, greater degree of concentration still at the sector level--tech stocks were on fire. And the valuations for those stocks were mind-bending, they were outrageous; Cisco was trading at nearly 200 times earnings.

Now if you fast forward to today, what you'd see is that to make up half of the current value of the S&P 500 Index it takes about 50 stocks, the long-term average is around 52. Concentration again which is more so a feature of market-cap-weighted indexing and not a bug, is within, at least by this measure, fairly normal ranges. Valuations, while in some cases quite high, certainly aren't nearly as elevated and out of range and completely out-of-whack as they were at the very pinnacle of the tech bubble. Apple is trading for 20 or so times earnings right now.

Glaser: If that concentration is less now, what about the performance, the fact that it's been driven by just the couple of names. Is that unusual?

Johnson: No, it's not entirely unusual. What you see is if you look at the distribution of just stock returns across the entire stock market over long periods of time most of the market's long-term historical returns have been driven by a small minority of stocks. Many stocks fade away, disappear entirely; others produce returns that are worse than you might get in Treasury bills. So the fact that a small minority of stocks are driving the majority of the market's returns, again feature not bug, as it pertains to cap weighted indexes and the funds that invest in them.

Glaser: Overall then, if you are an investor you've chosen cap-weighted indexes, there is nothing going on today that should make you question that assumption, as long as you knew what you're getting into when you bought them?

Johnson: No need to question the durability of the proposition of investing in cap-weighted index funds, but again inevitably there will be a period where we've gone a bridge too far, where valuations get stretched. What drives us toward that that precipice and what results once we have reached that precipice is not going to be the same factors, the same confluence of factors--macro, micro, fundamental, you name it--as we saw in the tech bubble, as we saw with the Nifty 50, as we saw going back through various sort of mania from times past.

It's important to understand that there will inevitably be points in time, like the tech bubble, where cap weighting exposed in hindsight looks like a bad idea, it's going to inevitably happen again. What matters more than anything is that investors are aware of this, they understand this, and they can accept it and stick with this particular strategy if it's their strategy of choice, through thick and through thin.

Glaser: Ben, thanks for your thoughts today.

Johnson: Thank you, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.


Kevin Brown: We have increased our fair value estimate for Federal Realty to $141 from $138, and we have increased our fair value estimate for Kimco Realty to $17.70 from $15.80. As a result, both companies currently trade at discounts to our fair value estimates. Additionally, we point out that Kimco currently provides a 6.7% dividend yield, one of the highest yields among U.S. REITs for income-oriented investors.

When analyzing the shopping center REITs, it is important to distinguish the rent that will and won't be impacted by e-commerce. Tenants that compete with online options, which includes segments like apparel, home decor and electronics, make up 35% of Federal's base rent and 44% of Kimco's base rent. While e-commerce will continue to grow, which will pressure sales growth at brick-and-mortar locations and force store closures, the negative impact will be greatly weighted toward the lower-end of the retail quality spectrum. Federal's portfolio has the highest average income and population density of all retail REITs, and Kimco has actively improved these metrics over the past decade. Retailers, even struggling ones, are looking to keep their profitable stores in Class A shopping centers that have the dynamics to produce high sales per square foot.

However, most of the rent for these companies comes from tenants insulated from e-commerce, which includes grocery stores, restaurants, fitness centers, dollar stores, autos, and entertainment tenants, as these segments still require consumers to shop directly at the store to get their product. Even as online options penetrate these segments, the physical store will remain the distribution point, driving sales and traffic to the center.

Overall, we expect low but steady and positive sales growth for shopping centers, leading to declining but still positive releasing spreads and internal NOI growth. Combined with a slowing disposition program and an increased focus on redevelopment projects at 7% to 8% yields, we think that these companies should continue to steadily grow over the next decade. does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.