Christine Benz: Hi, I'm Christine Benz for Morningstar. A firm's people are one of the key attributes our analysts use when they rate a fund. Joining me to discuss the People grade, as well as some funds with top People ratings is Morningstar's Russ Kinnel. He's director of manager research.
Russ, thank you so much for being here.
Russ Kinnel: Happy to be here, Christine.
Benz: Russ, let's get into the Analyst Rating and talk about the People grade as a part of the rating. What else figures into the Analyst Rating of a fund?
Kinnel: So, we rate People, Process, and Parent. Those all factor in. And then, we also do quantitative elements, where we assess the return potential of a category, and we also then factor in all the share-class fee level of a fund to come out with the Analyst Rating for each share class.
Benz: So, that People prong in particular, or pillar, let's talk about how you and the analysts get your arms around what grade you give a fund on its people. You're looking at manager, 10-year manager track record certainly, but what else?
Kinnel: So, one way to look at is, we're thinking about the competitive advantage. Obviously, there are lots of experienced managers or lots of analyst teams with big numbers. But we're really looking for who are the best who have abilities that just continue to add value over time. And so, of course, the managers' track record, especially if they have a very long track record, is very helpful. But also we look at it versus peers. Where do they stand out? Do they really bring something unique to bear? Because of course, lots of funds have smart managers with lots of degrees, and we're really looking for those that truly stand out. And really, it's not just people, it's the analysts, the traders, how do all of those pieces come together for the People [rating].
Benz: So, let's talk about some funds that earn High People grades. You wrote about this in the most recent issue of Morningstar FundInvestor. I noticed a couple of Causeway funds cleared that hurdle, both Causeway Global Value and Causeway International Value have high People grades. Let's talk about why you rate the firm highly, why you rate funds highly from this standpoint.
Kinnel: Well, you start with two very experienced managers in Sarah Ketterer and Harry Hartford. They're managers we've been covering probably since I started here 25 years ago, back when they were at Hotchkis & Wiley. They started Causeway in '01. But all this time, they've built a very good record, investing in large-value international and global stocks. Since they started Causeway in '01, they've built up a team. It's now 35 analysts. And really, all they do is this value strategy. And so, they're all steeped in that strategy. So, you really have a team and managers doing the same thing, all on the same page. I would note the recent performance has been lousy, in part because they've been disciplined, I think because they've really stayed true to that value framework.
Benz: Value has been out of style.
Kinnel: And so, they don't look very good when you think about it from that perspective. But, obviously, as our ratings imply, we think that when the cycle turns, they'll look a lot better.
Benz: Fidelity Growth Company, not a value fund, it's a high growth fund, also rates highly from the standpoint of people. Long-term managers, certainly, but what else factored into that high People grade for this fund?
Kinnel: That's right. Fidelity has a great analyst support team, well over 100 analysts globally. But obviously, if you look at our People ratings for Fidelity funds, you'll see there are some we're rating Average, some Above Average, and some High. So, obviously, Steve Wymer is the difference here. Just an outstanding growth investor, someone willing to invest in companies before they go public, but very much someone who is--as the growth world has evolved, he's continued to evolve. And so, as the Googles and Apples dominate, he's done a great job of rolling with that and really making the most of the FAANGs as well as the smaller companies out there. But just really an outstanding investor. That track record is absolutely remarkable. I'm kind of surprised he doesn't get more attention given how good that record is.
Benz: Let's talk about T. Rowe Price Tax-Free High Yield. There were a few T. Rowe funds that--or maybe more than a few T. Rowe funds--that earn a High People grade. But let's talk about this one. You and the team like T. Rowe's muni team quite a bit.
Kinnel: That's right. Bond funds tend to be team managed. And generally we rate all the teams' funds--they're going to have the same People score. Processes, it's possible to change. But it's very rare you'd see a different People score at a different fund if it's the exact same people. And so, at T. Rowe, of course, you've got that diversified, plain-vanilla kind of approach with an emphasis on issue selection. And so, over time, we've warmed up to T. Rowe's muni funds. If you watch the ratings over the years, we've gradually raised their ratings. And so, that's why you see the T. Rowe ratings at High-- a nice, stable, experienced team doing exactly what you'd expect them to do. Nothing very exciting, but again, who wants excitement from a muni fund?
Benz: Right. But this is kind of an aggressive one, right?
Kinnel: The High Yield one is, yes. So, it's one that's willing to take on a fair amount of credit risk. So, the High Yield fund is definitely on the more aggressive. I was speaking a little more toward their efforts and more generally, you're right, the High Yield fund is more aggressive. It takes on greater credit risk. So, in a downturn, you'd certainly expect it to have to lose more than your garden-variety muni fund.
Benz: Russ, it's always great to get your perspective. Thank you so much for being here.
Kinnel: You're welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.