US Videos

3 Funds That Have Lost Their Mojo

Gregg Wolper
Patricia Oey

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar.com. We award Gold, Silver and Bronze Morningstar Medalist ratings to those funds we think are most likely to outperform during a full market cycle. However, we may increase or decrease a fund's analyst rating due to changes in a fund's process, expected performance, management, or price. Today, we are taking a look at three former medalist funds that have been downgraded to Neutral during the past few months.

Patricia Oey: We've long had a favorable view of George Cipolloni and Mark Saylor, who together have run Berwyn Income since 2007. They employed a go-anywhere contrarian approach to this conservative-allocation income fund, and they generated strong results with good downside protection, with returns coming from both asset allocation and securities selection.

In February 2019, the managers unexpectedly resigned. Given that this flexible process essentially resided in those two departing managers, it was reasonable for parent Chartwell Investment Partners to start fresh and create a whole new fund. They appointed a team to run this strategy. And while members of the team have long track records running single-asset strategies at Chartwell, they don't have a public track record running a multi-asset fund in a mutual fund vehicle.

The new strategy is a combination of two existing Chartwell strategies, a mid-cap value fund combined with a core-plus fixed-income fund at a roughly 30% equity, 70% fixed income allocation. This is fairly staid considering what the process was before, where the managers had an all-cap mandate and also invested in a broader range of asset classes including high-yield, convertibles, preferred, and even cash, which sometimes hit 20% to 30% of the portfolio.

With a complete revamp of the process, we have lowered Berwyn Income's Morningstar Analyst Rating to Neutral.

Gregg Wolper: In February, Fidelity announced that Sammy Simnegar, who has managed Fidelity Emerging Markets since 2012, will be stepping down on Oct. 1. Now, he has had a very good record with this fund. He uses a quirky style. It's a little unusual, but it's worked very well for him. The new manager will be John Dance. Dance runs the Fidelity Pacific Basin and Fidelity Emerging Asia funds, and he has ability. We think highly of his skills. The Fidelity Emerging Asia fund, which is the only one of the two that we cover, gets a Morningstar Analyst Rating of Bronze. However, Dance has not run a broad emerging-markets fund. And so, for that reason, there's some uncertainty here. He also uses a slightly different style than Simnegar does. It's growth-oriented but not as much, and there are some other differences as well. For that reason, the Morningstar Analyst Rating of Fidelity Emerging Markets has been downgraded to Neutral from Bronze.

Connor Young: Proposed manager changes hurt USAA World Growth's prospects and warranted a downgrade in its Morningstar Analyst Rating to Neutral from Silver. In its current form, a proven team runs this strategy. The team has talented managers, benefits from deep analytical resources, and has delivered solid long-term results here and at MFS Global Equity. However, Victory Capital plans to move a portion of the strategies' assets to its own investment team, RS Investments, when it completes the acquisition of USAA sometime in 2019 second quarter. And this hurts this strategy's prospects for a few reasons.

First, the RS Investments' team is thin, consisting of just two managers and one analyst. And second, that team uses an approach that's highly correlated to the existing strategy, so it provides little diversification benefit and is not complementary. And third, USAA and Victory have not disclosed their plan to allocate the strategy's assets across investment teams. So, it's uncertain how the strategy's portfolio and the risk/reward profile will look going forwards. Investors should consider other options.