8 Upgrades, 11 Downgrades in April

In April, Morningstar manager research analysts rated 180 open-end mutual funds, exchange-traded funds, target-date series, separate account strategies, and collective investment trusts. Nine of these strategies are new to coverage--two of which are model portfolios that provide dynamic, multi-asset exposure to an array of investors. Advisors can customize model portfolios in client accounts, so their performance may vary significantly from the composites.

Across all published strategies, eight ratings were upgraded while 11 were downgraded. Two open-end mutual funds were placed under review. A select group of ratings are showcased below, followed by the full list of ratings for the month.

IShares JP Morgan USD Emerging Markets Bond ETF The Morningstar Analyst Rating for iShares JP Morgan USD Emerging Markets Bond ETF EMB was raised to Silver from Bronze due to the fund's cost advantage over peers and a well-diversified portfolio that should serve investors well. This strategy tracks the JPMorgan EMBI Global Core Index, which includes a broad array of emerging-markets government and agency bonds denominated in U.S. dollars. This focus on U.S.-dollar-denominated debt reduces risk, not only because it removes overseas currency risk, but also because heavily indebted issuers can't inflate their way out of these obligations (though they could still default). However, credit risk remains as almost half of the fund's assets are in below-investment-grade issues. The team works to diversify the fund's risk by weighting holdings by market value, which favors larger debt issuers, and limiting its largest country weighting.

AB Small Cap Growth Increased confidence in AB Small Cap Growth's QUASX management team raises its rating to Bronze from Neutral. Longtime lead manager Bruce Aronow remains on board. The January 2019 retirement of comanager Kumar Kirpalani was well planned, as the team promoted two analysts to comanager roles in advance of his departure. Esteban Gomez joined in 2016 and Heather Pavlak in 2018. Both worked with Kirpalani before assuming some of his coverage duties, which should help them pick up where he left off.

The team has had success finding good performers through fundamental research and identifying stocks that surprise Wall Street with better-than-expected earnings. However, this earnings-driven approach comes with risk as the team is willing to pay up for rapid growers. Still, the fund’s outsize gains in up markets have made up for heightened losses in down markets. Over Aronow’s tenure, the fund has come out ahead of the benchmark and most peers on a risk-adjusted basis.

Downgrades John Hancock Multimanager Lifetime The John Hancock Multimanager Lifetime target-date series was downgraded to a Neutral rating from Bronze after its longest-tenured manager retired, creating modest uncertainty about its process going forward. Longtime manager Bob Boyda stepped down from his position on this subadvised series in 2018 ahead of a planned retirement in 2019. Boyda's departure follows manager Marcelle Daher's departure for another opportunity in February 2018. Remaining comanagers Nathan Thooft and Rob Sykes have worked together for nearly a decade, but have only comanaged this series together since early 2018.

Despite the roster churn, the distinguishing characteristics of this series have remained: an equity-heavy glide path, a quality mix of well-known and boutique subadvisors, and meaningful exposure to volatile subasset classes. The series' overweighting in equities and sizable exposure to high-yield bonds can be expected to result in a bumpy ride for investors.

BlackRock US Government Bond BlackRock US Government Bond's CIGAX rating was downgraded to Neutral from Bronze following a review of the strategy's investment process and return profile. Lead manager Matthew Kraeger serves as head of BlackRock's mortgage team and shares responsibilities with comanagers Bob Miller and Siddharth Mehta. They discuss macroeconomic perspectives with strategists across BlackRock and consult with sector specialists on opportunities in more-focused subgroups before identifying investment themes.

Despite a well-resourced team and rigorous analytics, the strategy has struggled to translate some of its out-of-benchmark flexibility into consistent outperformance. These out-of-benchmark holdings have included some U.S. government-backed sectors, such as Treasury Inflation-Protected Securities and agency mortgage derivatives (under 5%), as well as nongovernment sectors, including commercial mortgage- and asset-backed securities. In-benchmark holdings like U.S. Treasuries and agency mortgages account for the majority of the fund’s assets.

New Ratings Vanguard Target-Date Series In its inaugural rating, the Vanguard Target-Date Series (CITs) earned a Gold rating. Low costs have been the greatest advantage of Vanguard's target-date series versus peers. CITs typically charge lower fees than mutual funds, making the series' low costs less of a difference-maker, but Vanguard's longstanding commitment to rock-bottom expenses inspires confidence that the series will continue to be one of the cheaper options over the long term.

The series' overall stock/bond split across the glide path has been in place since mid-2006. For the most part, it sticks close to the peer norm. The glide path starts with a 90% equity exposure until a fund hits 25 years to retirement and continues to decline until arriving at a 30% equity stake seven years after retirement. The series’ equity glide path deviates the most from the peer average near retirement when account balances can be expected to be near their peaks. The series takes on more equity risk at the retirement date compared with the norm and stands out for its larger allocation to foreign bonds compared with peers. The fund’s currency exposure is hedged back to the U.S. dollar, which keeps volatility in check.

T. Rowe Price Global Growth Stock The rating for T. Rowe Price Global Growth Stock RPGEX was initiated at Silver because of the fund's strong leadership and skilled analyst team. Lead portfolio manager Scott Berg has worked on the fund since its October 2008 inception.

Berg builds a diversified global portfolio and is cognizant of country dynamics when making investment decisions. Chinese and Indian names are perennial favorites here and the manager generally invests in more emerging-markets stocks than the fund's MSCI All Country World Index benchmark. That penchant adds to the fund’s volatility, as evidenced by a higher standard deviation over Berg’s tenure versus the index and peers. But that’s also helped the fund outperform in market rallies. The team is valuation-conscious and adjusts positions frequently, resulting in greater turnover than peers. The portfolio management and research here are topnotch, and the fund also benefits from below-average fees.