3 Recently Downgraded Funds
Personnel changes, relatively high costs, and a shrinking asset base led us to re-evaluate our ratings on these funds.
Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar.com. Our fund analyst ratings are forward-looking qualitative measures representing our conviction in a fund's ability to outperform during a full market cycle. Though ratings tend to be stable, we do adjust them occasionally. We upgrade funds if some change leads us to believe that they're more likely to outperform, and we downgrade them when we think the opposite. Today, we're looking at three funds that have recently been downgraded.
Tom Nations: We recently downgraded American Century Value to Bronze from Silver for a few reasons. First, manager Michael Liss' contrarian bent led to forays into deep value names, which had been out of favor, and contribute to the fund's recent performance slump. There's also been turnover at the analyst level, and the fund's price tag, while holding steady, looks expensive relative to category peers that have consistently reduced fees. That said, there's still a reason for optimism. First, Liss is a seasoned investor that has led the strategy for over a decade now. As such, he's led the strategy through bouts of underperformance in the past and analyst turnover as well. Finally, we remain confident in Liss' proven quality value approach, which has delivered consistently superior risk-adjusted returns over full market cycles.
Erol Alitovski: Gateway Fund is a hedged equity strategy that uses put options to dampen the downside. The strategy was recently downgraded to Bronze from Silver following a reassessment of its relative ranking to options-based strategy peers. With that said, there still is merit for investors considering the strategy based on the Positive People Pillar--namely, Michael Buckius and his extensive experience trading options and the fees that are very competitive versus peers. The strategy charges 70 basis points for institutionally distributed share classes versus 114 basis points for the category median. The strategy no longer differentiates itself from a growing list of peers in this space. The process in general is lacking differentiation, and some of the attributes within its tool kit don't compare as well to peers as they used to--namely, its portfolio hedges are not as dynamic in this current market environment. So, on a forward-looking basis, we feel that the overall Morningstar forward-looking assessment is worthy of a Bronze rating versus a Silver.
David Kathman: We recently downgraded BBH Core Select's analyst rating from Silver to Bronze, mainly because its shrinking asset base has made us less confident in its ability to outperform going forward. As recently as 2013, this fund had about $6 billion in assets. But over the past few years, poor relative performance has caused that base to shrink to under $1 billion. Now, the poor performance in itself isn't too concerning because we still like its disciplined strategy. But all those outflows have caused the managers to have to sell a lot of stocks. And that led to a big capital gains distribution last year, which in turn forced the managers to sell even more stocks. We still like the fund, but all those capital gains have weighed it down and made us a little less confident in it.