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Fund Spy: Morningstar Medalist Edition

May Analyst Ratings Upgrades, Downgrades, and New Coverage

Highlights and lowlights from last month.

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We assigned Morningstar Analyst Ratings to 535 fund share classes, exchange-traded funds, and separately managed accounts/collective investment trusts in May 2020. Of these, 325 maintained their previous rating, 48 were upgraded, 111 were downgraded, two were placed under review owing to material changes, and 49 were new to coverage.

Distilling share classes and vehicles down to distinct strategies, Morningstar analysts assigned ratings to 141 unique strategies. Of these, 15 were new to coverage while the remaining strategies had at least one investment vehicle previously covered by a Morningstar analyst. Below are a few highlights of the upgrades, downgrades, and new coverage for the month of May.

Upgrades
Diamond Hill Corporate Credit (DSIYX) earns an upgrade to its People Pillar rating thanks to its investment team’s seasoned experience and demonstrated skill. This upgrade, combined with an Above Average Process rating and High Parent rating, result in an upgrade of the strategy’s cheapest share classes to Silver from Bronze, with Bronze and Neutral ratings for the more expensive share classes. Co-lead managers Bill Zox and John McClain, supported by Suken Patel, form the investment team behind this strategy. Zox joined the firm as an equity analyst in 2001 and has been named on this strategy since 2008. McClain joined Diamond Hill in 2014 as a credit analyst with experience in high-yield and distressed credit markets and was named comanager of this strategy in February 2015. Their collective experience and demonstrated analytical and portfolio management skills merited a People Pillar rating upgrade to Above Average.

MFS New Discovery (MNDIX) earns upgrades to its cheapest share classes under Morningstar’s enhanced Analyst Rating methodology to Silver from Bronze, while its pricier share classes maintain their Bronze ratings. Despite some turnover in the management team, manager Michael Grossman is experienced and benefits from the firm’s ample equity research resources. Grossman focuses on financially healthy firms with strong competitive advantages, which often command premium multiples. This means the strategy’s average price multiples tend to run higher than those of the strategy’s Russell 2000 Growth Index benchmark. However, Grossman has demonstrated the value of his approach, as evidenced in the strategy’s strong record under his tenure.

New to Coverage
AQR Large Cap Defensive Style (AUEIX) debuts with a Silver rating on all share classes. It earns Above Average ratings on both its People and Process Pillars and an Average Parent rating. AQR’s emphasis on stocks’ fundamental risks comes through here. The four-person management team of seasoned leaders seeks out companies with lower-than-average fundamental and market risk, which should benefit the strategy in downturns. The portfolio is then built with an optimizer that aims to maximize exposure to high quality large-cap U.S. stocks and minimize volatility. The holistic approach to risk reduction should deliver attractive volatility-adjusted performance over the long term.

Downgrades
Meridian Growth (MRIGX) benefits from a strong management team. However, concerns regarding sell discipline warrant a downgrade of the strategy’s Process Pillar rating to Average from Above Average, resulting in downgrades to Bronze from Silver for most share classes, with a Neutral rating on the more expensive C shares. Managers Chad Meade and Brian Schaub have been at the helm of this strategy since 2006, and they are supported by an experienced analyst team. The duo seeks attractively priced small- and mid-cap cash-generative companies and will also invest in private companies. But small-cap investing has its risks, including liquidity. Steep drops in holdings such as Endologix (ELGX) and National CineMedia (NCMI) have forced the managers to hold illiquid chunks of small companies.

Delaware Small Cap Value’s (DEVIX) cheapest share classes maintain their Silver ratings, while its pricier share classes earn Bronze and Neutral ratings under Morningstar’s enhanced analyst rating methodology. Lead manager Chris Beck has run this strategy for more than two decades, and he is supported by four seasoned comanagers. Beck is responsible for energy, financials, and real estate sector coverage, while the remaining sectors are divided among the rest of the management team. This team focuses on fundamental analysis to identify companies with strong cash flows, leveraging a valuation- and earnings-quality-driven quantitative model. The team has favored technology and industrial stocks, and the portfolio tilts toward larger stocks relative to its small-value Morningstar Category peers.

Supreet Grewal does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.