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Fund Spy: Morningstar Medalist Edition

Morningstar Analyst Rating Activity in a Tumultuous March

Morningstar analysts rated 1,338 share classes and vehicles and 316 unique strategies in March.

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Morningstar analysts assigned Analyst Ratings to 1,338 fund share classes, exchange-traded funds, and separately managed accounts/collective investment trusts in March 2020. Of these, 778 maintained their previous rating, 81 were upgraded, 441 were downgrades, 17 were new to coverage, and 21 were placed under review owing to material changes, such as manager departures.

Filtering share classes and vehicles to isolate unique strategies, Morningstar issued 316 Analyst Ratings during March. Of these, three were new to coverage, and the remainder had at least one investment vehicle that had been previously covered by a Morningstar analyst. Here are some highlights of the upgrades, downgrades, and new coverage for the period. 

Upgrades
Fidelity Floating Rate High Income (FFRHX) earned an upgrade to both its People and Process Pillar ratings, resulting in improvement of its Analyst Rating to Silver from Bronze for its cheaper share classes, and Neutral for its more expensive options. The upgrade of the strategy’s Process rating to Above Average from Average rewards the evolution of its circumspect approach, denoted by strong research focused on bottom-up decisions designed to avoid the market’s greatest dangers. Moving from what was arguably extreme caution relative to other bank-loan offerings, the current management team now judiciously sprinkles in some more aggressive names and keeps less cash in the portfolio. The strategy’s People Pillar rating stepped to High from Above Average owing to the addition of a veteran manager with 14 years of tenure at Fidelity and the robust nature of its analyst efforts.

With the newest team members settling in and starting to make an impact, T. Rowe Price Health Sciences’ (PRHSX) People Pillar rating rises to Above Average from Average. Combined with a High Parent rating, this change bumps the fund’s Analyst Rating to Bronze. The team has stabilized after a period of manager and analyst churn. Manager Ziad Bakri shored up the analyst team with the key 2018 additions of two experienced biotech and pharma analysts, whose 22 and 18 years of experience enabled them to hit the ground running. The team’s focus on innovative drug companies and ability to venture down the market-cap spectrum places the strategy at an advantage in an area ripe for active management, where company-specific fundamental research can make a big difference in distinguishing results from passive options.

Downgrades
American Beacon SiM High Yield Opportunities’ (SHOCX) differentiated approach has produced solid results since inception, but limited risk management and constrained research capacity warrants a Process Pillar downgrade to Below Average from Average. The strategy earns an Analyst Rating of Negative for its most expensive C share class, while the remaining cheaper options are rated Neutral. The lean three-person investment team maintains differentiated industry positioning and runs a concentrated portfolio of 80-100 holdings, placing high conviction in industries that exhibit stable cash flows and benefit from demographic trends such as healthcare. This concentrated positioning stung in early 2020, when a bet on the price of oil rising turned against the team, causing the strategy to suffer deeper losses than nearly all high-yield bond Morningstar Category peers.

Despite the loss of a longtime manager, AB Small Cap Growth's (QUASX) team remains strong, but the strategy’s straightforward fundamental approach doesn’t differentiate itself from small-growth competitors. After the strategy’s first run through Morningstar’s enhanced Analyst Rating methodology, its cheaper share classes retained a Bronze rating, while its more expensive share classes were rated Neutral. Lead manager Bruce Aronow joined AllianceBernstein (then Alliance Capital) from Chancellor Capital Management in 1999, alongside comanagers Kumar Kirpalani and Samantha Lau. Kirpalani, whose sector coverage made up about a third of the fund, retired in January 2019, but the team prepared by adding two analysts prior to his departure who joined the management ranks concurrent with the veteran’s retirement.

The specter of volatility haunts Invesco Oppenheimer Global Strategic Income (OPSIX). Personnel turnover and process tweaks have eroded our confidence in this strategy, warranting downgrades to its three pricier share classes to Negative from Neutral, while its three cheaper share classes remain Neutral. The manager ranks have seen significant shifts: Since 2009, eight managers have left the strategy’s roster, including Ruta Ziverte and Krishna Memani over 2019. During lead manager Hemant Baijal’s short tenure (named in early 2018), he has altered the strategy’s makeup to a significant degree, noticeably reducing domestic credit exposure in favor of non-U.S. debt and currencies. This has contributed to higher levels of credit and currency risk than its typical multisector bond category peer, with few meaningful controls for the additional leeway.

New to Coverage
Owing to its cost advantage, broadly diversified portfolio, and effective ESG screens, iShares ESG MSCI USA Leaders ETF (SUSL) debuts with a Silver rating. This fund combines its ESG mandate with many advantages of traditional index funds: a low fee, low turnover, and a broad market-cap-weighted portfolio harnessing the markets collective wisdom. It tracks the MSCI USA Extended ESG Leaders Index, which targets large- and mid-cap U.S. stocks representing half the market with the strongest ESG traits relative to sector peers. The strategy’s underlying ESG ratings are tailored to each industry, focusing on the most relevant ESG risks and opportunities that could affect long-term financial performance. For example, packaging material and waste is more relevant for consumer-oriented firms than it is for banks. On the whole, this is a compelling choice for socially conscious investors, especially as it’s one of the cheapest large-cap funds.

R.J. D'Ancona does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.