Fund Spy

The 10 Biggest Funds to Get Upgrades in 2018

Russel Kinnel

This article was originally published in the October 2018 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

We rate more than a thousand funds every year, and those Morningstar Analyst Ratings are subject to change anytime we think something fundamentally alters the picture. It's hard even for us full-time fund analysts to keep up with all the changes, so I imagine a couple of changes get lost along the way for many investors.

With that in mind, let's look back at the 10 largest funds that were upgraded in 2018.

 PIMCO Total Return (PTTRX)  
Upgraded to Gold from Silver
When Bill Gross abruptly left PIMCO, we downgraded this fund to Bronze. Millions of investors left the fund, but a very strong team of managers, analysts, and traders remained. We were uncertain about how the new managers would work together and whether the largest wave of redemptions in history would hurt performance. We have made a few visits to PIMCO since then, and our confidence in the people and process has grown. In addition, the outflows didn't seem to have any impact on performance, a credit to the fund's design and its trading desk. The fund has outperformed peers and benchmark since Gross' departure. (We also raised the rating of near clone  Harbor Bond (HABDX).)

 MFS Value (MEIAX)
Upgraded to Gold from Silver
Steven Gorham and Nevin Chitkara have proved to be skilled value investors who moderate risk with an emphasis on quality. They look for strong balance sheets and high returns on invested capital. That's apparent from the fund's maximum drawdown of 46% versus 52% for the Russell 1000 Value Index.

 Fidelity Extended Market Index (FSEVX)
Upgraded to Gold from Silver
Fidelity's launch of zero-cost index funds benefited its established index funds as well as the new zero-fee funds. Fidelity lowered fees across the board and got rid of minimums. Thus, this fund is now just 5 basis points.

 T. Rowe Price Equity Income (PRFDX)  
Upgraded to Silver from Bronze 
We've been impressed with the job John Linehan has done since taking over for Brian Rogers in 2015. He has maintained the fund's emphasis on value with a bit of yield, but he did add some new names like Total (FP) and  Anthem (ANTM). It's early, but it is still encouraging to see the fund ahead of benchmark and peers so far.

 T. Rowe Price Overseas Stock (TROSX) 
Upgraded to Silver from Bronze
Ray Mills has quietly built a strong record over 11 years at this fund. He ranges from value to growth names that look attractive to him based on a wide variety of measures. The goal is to let stock-picking drive performance rather than macro calls, and it has worked well.

 Vanguard Morgan Growth (VMRGX)
Upgraded to Bronze from Neutral
This is a mild-mannered play on growth. Assets are spread out over four subadvisors, each of which starts ahead of the competition thanks to an expense ratio of just 0.38%. Paul Marrkand of Wellington runs about half of the fund, and Kathleen McCarragher of Jennison Associates (and the Silver-rated  Harbor Capital Appreciation (HACAX)) runs a fourth of assets under management. The rest is run by Vanguard's quantitative equity group and Frontier Capital. The current lineup has provided dependable if unexciting performance.

 T. Rowe Price Small-Cap Stock (OTCFX)
Upgraded to Bronze from Neutral
This is another case of warming up to a relatively new manager. Frank Alonso has shown he is up to the challenge of running a very large small-cap fund. He has maintained the tame growth-at-a-reasonable-price approach while trimming some of the tiniest names from the portfolio. Although his management experience is modest, Alonso has been with T. Rowe Price since 2000.

 Vanguard Strategic Equity (VSEQX)
Upgraded to Silver from Bronze
Vanguard's quantitative equity group has made strides that are showing up in performance at this fund and others. It runs the whole portfolio here using value, growth, momentum, and corporate-action data. This has been a tough year for quants, but this fund is 300 basis points ahead of its benchmark and 400 ahead of peers. And fees are very close to what you'd pay for an index fund: 0.18%.

 T. Rowe Price QM U.S. Small-Cap Growth Equity (PRDSX)
Upgraded to Gold from Silver
Speaking of quants, this is a real gem. It wasn't all that impressive until Sudhir Nanda took over in 2006. He runs a diffuse portfolio using an array of fundamental measures to pick stocks. Talk about consistent--the fund has beaten peers in every year since Nanda took over.

 Vanguard Global Equity (VHGEX)
Upgraded to Silver from Bronze
This fund's subadvisor lineup has been in place since August 2012, and it has produced excellent results since that time. The subadvisors--Acadian, Baillie Gifford, and Marathon--have markedly different strategies, though the fund overall has a growth tilt. Combining good subadvisors with a fee that is 60 basis points cheaper than the no-load median gives you a strong competitor in the world large stock Morningstar Category.

Russel Kinnel has a position in the following securities mentioned above: HACAX PTTRX. Find out about Morningstar's editorial policies.

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