4 Fund Upgrades

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Morningstar's Analyst Ratings are forward-looking assessments of how our analysts expect funds to perform relative to their peers and to their benchmarks. Joining me to share four recently upgraded funds is Russ Kinnel. He's Morningstar's director of manager research.

Russ, thank you so much for being here.

Russ Kinnel: Glad to be here.

Benz: Russ, let's talk about just very generally the rating system. It's different from the Star Rating. But explain what you and the team are thinking about when you decide whether to rate a fund as a Medalist fund.

Kinnel: That's right. It's a forward-looking based on our thoughts on the likelihood of a fund outperforming benchmark and peers, whereas obviously the Star Rating tells you in the past whether it outperformed peers on a risk-adjusted basis. So, we're looking at--we have five Ps, People, Process, Parent, Price, Performance--and really kind of looking at all those areas. Obviously, they're all related, and we see how do those sum up to overall. The best funds we rate Gold, then Silver, and then Bronze--those are all recommended levels--then Neutral, obviously, what it is, and then Negative, the funds we think will likely underperform.

Benz: The first newly upgraded fund that we're going to talk about, Russ, is from a familiar shop. This is Dodge & Cox Global Bond. Let's talk about what prompted the upgrade from Bronze to Silver.

Kinnel: Sure. If you think about--we knew they had a good thesis in place, because they have a domestic bond fund that we rate Gold, they have a foreign equity fund we rate Gold. This is obviously kind of combining those efforts with a global bond fund. So, taking advantage of their skills in security analysis to do global bonds. There's a lot of potential there and we kind of wanted to see how they did with it. So, it started off at Bronze, raised it to Silver, as we saw that they handled--one of the new issues you have with a global bond fund is currency; we liked what they did there--also, fees have come down. The fund started at a cheap 60 basis points. Now, it's down to 45 basis points, which makes it really cheap. So, a lot of good things coming together there. And then of course, Dodge & Cox is a solid team, consistent approach. Just a lot of good things in the mix here.

Benz: The next fund on your list went from Neutral to Bronze. This is FPA International Value. It sounds like it should be a core type fund, but it's actually one that's focused on small- and mid-cap foreign stocks, correct?

Kinnel: That's right. It's got a focused portfolio with a small- and mid-cap tilt and they hold a fair amount of cash. So, you have a source of volatility on the one hand; on the other hand, the cash mutes that out. So, it's not too volatile. But as you imply, it's clearly a niche fund. It wouldn't be your core holding. But it's a good one. Pierre Py, we like, has a nice value approach. Early on in the fund's existence, there was some turnover with managers and analysts that kept us at Neutral. But since then, they've kind of proven the concept as they've gotten stability in the management suite, as well as a strong process and executed well, producing pretty good performance. So, over time, we've warmed up to this one.

Benz: The last funds that we're going to talk about, they are a pair of funds, they go together. Baird Aggregate Bond, I know, is one that we've liked for some time and then Baird Short-Term Bond. These are managed by the same team. They went recently to a Gold rating. Let's talk about why our conviction level is so high in this team and in these funds.

Kinnel: As you say, we've liked these Baird funds for a while because they're conservative, well-run funds that don't try anything outside of their area of expertise. So, they don't do exotic bonds. They don't do leverage or big macro calls. They just do really good selection in the core bond space. And we've known Mary Ellen Stanek for a long time. But over time we've gotten to know the rest of the team around her, up in Milwaukee at Baird, much better. And so, just kind of gradually our confidence has increased in the team and therefore reflected in that notch-up to Gold.

Benz: Russ, thank you so much for being here to share four newly upgraded funds.

Kinnel: You're welcome.

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