Fund Spy: Morningstar Medalist Edition

A Flurry of Ratings in January 2019

Shannon Yan

In January 2019, Morningstar manager research analysts affirmed the Morningstar Analyst Ratings of 72 funds and eight target-date series; upgraded the ratings of five funds and one target-date series; downgraded the ratings of five funds; placed four funds’ ratings under review; and assigned new ratings to four funds. Below are some of January’s highlights, followed by the full list of ratings changes.

American Funds SMALLCAP World (SMCWX) added more research capability recently to help manage its whopping $40 billion asset base, raising the strategy's Morningstar Analyst Rating to Silver from Bronze. Three equity divisions, which espouse similar long-term-oriented investment philosophies but do not share investment ideas, now manage this strategy compared with the two teams it had in the past. This addition enhances diversification and invites different managers and analysts to play to their strengths. The strategy’s affinity to growth stocks and emerging markets won’t always work to its advantage, but it has prevailed over the long haul: The strategy outperformed the MSCI All-Country World Small Index in four of the six full market cycles since its 1994 inception.

 PIMCO Emerging Markets Bond’s (PEBIX) evolving process shows promise, supporting an upgrade in the strategy's rating to Bronze from Neutral. Historically, the strategy allowed for large country positions that dragged on performance when hard-currency emerging-markets debt struggled in late 2014 and 2015. In 2016, the firm formed an emerging-markets portfolio committee to help guide position-sizing as well as other process enhancements to manage the risk of individual positions. These changes resulted in smaller bets and a more-diversified portfolio without hemming in the process, which helped pave way for the strategy's top-decile showing in the emerging-markets bond Morningstar Category for the trailing three-year period through December 2018. Plus, a veteran manager still runs the strategy.

 BlackRock LifePath Dynamic's (LPBKX) target-date series gets an edge from one of the most forward-thinking glide-path and asset-allocation teams in target-date funds. BlackRock’s global tactical asset-allocation team, led by Phil Green, handles the underlying strategy selection. Green has the full suite of BlackRock strategies to choose from, including mutual funds, exchange-traded funds, offshore separate accounts, and derivatives. That’s a greater degree of flexibility than many peers who are confined to mutual funds. The underlying funds here also include a mix of strong offerings. The series’ ratings get upgraded to Bronze from Neutral.

The impending departure of lead manager Mark Vaselkiv knocks  T. Rowe Price High Yield’s (PRHYX) Analyst Rating down two notches to Bronze from Gold. Vaselkiv, who has successfully married rigorous bottom-up credit selection with top-down macro analysis since 1996, will step away from day-to-day management in 2020. Rodney Rayburn will succeed him. Rayburn has some portfolio-management experience, but his track record elsewhere is short, and that strategy fishes primarily in bank loans and distressed debt. He also will need to orchestrate this strategy’s many moving pieces, such as non-U.S. bonds and equities. Even with the change, however, the strategy still has several marks in its favor, including a well-regarded analyst bench and the firm’s history of putting shareholders first.

 RiverPark/Wedgewood (RWGIX) has struggled against headwinds. A veteran subadvisor employs a focused low-turnover approach here that melds elements of classic growth and value investing. Since 2013, though, the market has turned against the strategy’s style, contributing to sluggish results and triggering waves of disruptive outflows. Lead manager David Rolfe and his team also have made their share unforced errors, including buying some lower-quality stocks that looked out of place in a portfolio that is supposed to favor strong growers with durable competitive advantages. The strategy, which is about three times older than this open-end mutual fund, could rebound, but volatile flows have kept this strategy from keeping up with the 27-year-old separate account composite run in the same way. The RiverPark fund family also has had to liquidate many of the strategies it has launched since 2010, which contributed to a downgrade of this fund’s Parent Pillar rating to Neutral; this may not be best way to access this strategy. The Wedgewood Concentrated Large Cap Growth SMA retains a Bronze Analyst Rating, but this vehicle’s rating drops to Neutral.  

New Ratings:
 BlackRock Advantage Large Cap Growth (BMCAX) became a purely quantitative strategy in June 2017, seeking modest outperformance via many small bets rather than blow-out returns through a few big wagers. It’s a game of inches, but one in which this strategy's management team has the scale and resources to compete. The research-driven group boasts a pair of managers with long histories together and 80 quant analysts. The team builds a multifactor model with traditional inputs and nontraditional signals, such as job postings to gauge economic strength, and is constantly on the prowl for new data sets to incorporate. A low price tag also helps the strategy. It had a Neutral rating as it went through a succession and manager changes before Morningstar dropped it from coverage in February 2016. It merited renewed coverage and a Bronze rating after BlackRock’s accomplished Systematic Active Equity team took over in June 2017.

Shannon Yan does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.