5 of the Biggest Upgrades of 2019

When we downgrade funds, it is sometimes due to some dramatic event, such as a manager change or a strategy change. But upgrades are more subtle.

On rare occasions they’re triggered by big news, such as a big fee cut or the arrival of a better manager. More often, a fund earns the upgrade by continuing to prove itself as it executes its plan. Over years of conversations and on-site visits, we get to know the team behind the fund better. If it executes its plan and adds value, we may upgrade. Stability in the management and analyst ranks is also a positive sign of team buy-in and cohesion. Here, then, are five of the biggest upgrades of 2019 so far.

Dodge & Cox Global Bond DODLX It was easy to see this fund's appeal from the start in 2014. Dodge & Cox Income DODIX has long been a favorite for its skill in finding good corporate bonds, and for its manager and analyst stability. This fund builds on those skills by broadening the firm's bond work around the world.

We raised the fund’s Morningstar Analyst Rating to Silver from Bronze, as it has lived up to our expectations and proved it can handle the foreign-currency issues associated with running a global-bond fund.

Like its domestic sibling, this fund leverages the firm’s strengths in security analysis by investing about half of the portfolio in corporate debt, a figure much higher than is typical in global bonds. The fund also has a larger emerging-markets weighting than peers, so its profile is really a mix of caution and aggressiveness.

Another reason we liked the fund right away is that Dodge & Cox charged a cheap expense ratio from the start. It began at 0.60% and has come down to 0.45%, even though the fund has just $250 million in assets. That makes the fund much cheaper than most peers.

The fund’s skill and low fees have given it some of the highest returns in the Morningstar Category since it was launched.

Fidelity Select Health Care FSPHX We upgraded Fidelity Select Health Care to Gold from Silver. Fidelity has built a very strong team of analysts under lead manager Eddie Yoon.

Since taking the helm in October 2008, Yoon has produced returns of 18% annualized versus 15.2% annualized for the S&P 1500 Health Care Index. Yoon has the support of about a dozen analysts, including medical doctors and other experts.

Those who remember the old Fidelity may recall that managers used to rotate around sector funds in order to gain experience that would make them good managers of diversified funds down the road. However, that changed as the firm emphasized analyst and other career paths beyond running a diversified fund. Now a number of the firm's sector funds are run by seasoned specialists.

The fund charges a modest 0.71% expense ratio, adding to its appeal.

FPA International Value FPIVX Launched in December 2011, FPA International Value took a while to settle into a groove, and we waited until April 2019 to raise its rating to Bronze. The fund began with Pierre Py and Eric Bokota as managers, but Bokota left less than one year in, and the team has had other departures that gave us pause. But things have settled down around Py and a three-person analyst team.

Py runs a focused value portfolio with a large cash cushion that mutes some of the volatility associated with concentrated holdings. He looks for companies trading at discounts of at least 30% to his estimate of their intrinsic value, and he tends to find many of his holdings in small- and mid-cap territory.

Since inception, the fund’s returns are largely in line with the foreign small/mid-blend category and the MSCI World ex USA SMID Index. However, the fund’s modest volatility has given it superior risk-adjusted returns.

We like the fund’s profile, and its small asset base allows Py to make the most of his small-cap finds.

Baird Aggregate Bond BAGIX

Baird Short-Term Bond BSBIX We rated Baird Aggregate Bond Silver when we launched our ratings in 2011, and raised these two funds to Gold in early 2019. The funds are conservative and cheap, and don't venture outside their circle of competence. Baird is a much smaller firm than the likes of PIMCO, so it's a smart strategy to not try to emulate PIMCO with its use of derivatives, emerging markets, and high yield. Rather, Baird focuses on investment-grade government bonds, corporate bonds, and securitized debt, and leaves the esoteric investments to others.

The funds are run by five portfolio managers and 12 analysts led by chief investment officer Mary Ellen Stanek. Their focus on modest gains versus the category and benchmark has made the fund a reliable entrant. Since we split up the intermediate-bond category into two groups with the more aggressive funds going to core-plus, the appeal of funds like this is more on display.

But really it was just repeated visits with the Milwaukee-based firm that led us to have high enough conviction to raise the funds to Gold. We have long known Stanek but have been impressed by the rest of the team over the years.

It’s worth noting that Baird’s institutional fees, if you meet the $25,000 minimum, are quite cheap, but fees are only modestly below average for the retail shares available for a $2,500 minimum.