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4 Downgrades Highlight Fundamental Weakening

Fresh looks at these funds result in reduced ratings.

Securities In This Article
Lord Abbett Value Opportunities A
Nuveen Mid Cap Value R6
AMG River Road Mid Cap Value N
Royce Premier Invmt
Nuveen Large Cap Value R6

This article was originally published in the February 2019 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

We watch closely for signs of fundamental deterioration in our Morningstar Medalists and will downgrade when we think there is no longer a case for recommending a fund. Four equity funds' Morningstar Analyst Ratings were recently downgraded to Neutral.

In December 2018, TIAA-CREF Large-Cap Value's TRLIX rating was downgraded to Neutral from Bronze following a manager retirement and subsequent changes. Comanager Tom Kolefas retired in November 2018, and lead manager Rich Cutler transitioned to a lead manager role on TIAA-CREF Mid-Cap Value TIMVX. As a result, Charlie Carr became the lead manager here. Carr had never run an open-end mutual fund before but has over a decade of value investing experience. He has run a small sleeve, approximately $2.5 billion, of the giant $112 billion CREF Stock account since 2014, but the firm declined to provide the record of his sleeve. Cutler will technically still be on the fund but only as a backup. Thus, the fund is much less compelling.

A new lead manager also inspired a downgrade of Lord Abbett Value Opportunities LVOAX to Neutral from Bronze. New manager Eli Rabinowich had a mixed track record on other strategies during his tenure at previous firm Pzena Investment Management, and he still needs to prove himself here. The fund's strong record under previous managers Tom Maher and Justin Maurer is no longer relevant given the drastic changes. Not only does this personnel change result in a new team, Rabinowich is also introducing changes to the process that drives the strategy. He is incorporating more quantitative elements and shifting it to a more systematic approach. Changes to the team and process raise questions and reduce our conviction in the fund's competitive advantage.

AMG Managers Fairpointe Mid Cap CHTTX received a two-notch downgrade, to Neutral from Silver. We have grown concerned about the team's ability to source new ideas and its openness to understanding threats to longtime favorites. Since portfolio manager Thyra Zerhusen came aboard in May 1999, the team has largely cycled between the same 200 stocks--selling when valuations get rich and buying when prices drop. The team's reluctance to explore new investment ideas calls into question its ability to continue delivering outperformance through stock selection. Additionally, the team has held on to names despite a break from its initial rationale for purchasing the stock, which raises concerns surrounding the sell discipline. While the fund's contrarian style has been out of favor, it has struggled over the most recent market cycle relative to peers with similar mandates. Further, over the long term, the fund's since-inception risk-adjusted results lag the Russell Midcap Value Index. It also trails its S&P MidCap 400 Index benchmark since the index's inception in March 2007 through January 2019, owing to its above-average standard deviation.

Finally, Royce Premier's RYPRX rating was downgraded to Neutral from Bronze in October 2018. A lack of conviction in the fund's approach, specifically its reluctance to invest in healthcare stocks, inspired the downgrade. The portfolio has been consistently underweight the healthcare sector relative to its small-growth Morningstar Category peers and the more relevant Russell 2500 benchmark. The team justifies this lack of exposure by insisting that speculative biotechs and pharmaceuticals do not meet its quality requirements. However, there are other healthcare businesses, and since the sector makes up approximately 14% of the fund's prospectus benchmark, the Russell 2000 Index, the team should not entirely neglect it. Insufficient research resources are allocated to the sector, and the perennial underweighting is not supported by strong investment rationale. The underweight position has consistently detracted from performance over the trailing five-year period. While its stock-picking was enough to overcome this shortfall, the team's lack of consideration in the sector is a disadvantage relative to its active peers.

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About the Author

Linda Abu Mushrefova

Senior Product Manager, ETF's
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Linda Abu Mushrefova, CFA, is a manager research analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. She covers equity strategies.

Before rejoining Morningstar in 2017, Mushrefova was an analyst on the fixed-income team at Neuberger Berman, covering opportunistic strategies. From 2013-16, she held a variety of roles at Morningstar, including as a product consultant and a data analyst for the firm's open-end and hedge fund databases.

Mushrefova holds a bachelor's degree in economics from Northwestern University. She also holds the Chartered Financial Analyst® designation.

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