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5 of the Biggest Fund Upgrades of 2020

Improved processes take T. Rowe Price New Horizons and Polen Growth up a notch.

Last month, I was Debbie Downer in writing about five fund downgrades. This month, I'm Mr. Sunshine with five upgrades for you.

You may recall that we made changes to our ratings methodology on Oct. 31, 2019. All Morningstar Analyst Ratings published since then have used our enhanced methodology, which places greater emphasis on fees and the likelihood of beating a Morningstar Category benchmark.

As we work through our coverage list of roughly 1,400 funds, any ratings changes you see are due to either a reassessment of the strategy's fundamental pillars of People, Process, and Parent or to the enhanced methodology--or it could be a combination of the two. I've chosen some of each to highlight.

Henry Ellenbogen's departure in March 2019 was a big loss for T. Rowe Price New Horizons PRNHX. Yet, the closed strategy hasn't lost its touch under Joshua Spencer. Spencer had a solid seven-year track record at T. Rowe Price Global Technology PRGTX but moving from a sector strategy to a diversified one is never easy. Given that this fund has a huge $31 billion asset base and a mandate to invest in fast-growing companies, it was a challenging assignment.

Yet, we've liked what we've seen from Spencer. He trimmed the long tail of names at the end of the portfolio but has otherwise largely maintained Ellenbogen's winning formula. Spencer looks for fast growth potential but with an eye to quality. We upgraded the strategy's Process rating to Above Average, and that carried its overall rating to Silver.

Polen Growth POLRX also received a Process upgrade that carried it to a Silver rating. We raised it to High for its disciplined approach. Senior analyst Robby Greengold describes it so well that I hope you'll pardon my copying and pasting: "The team members are sticklers for financially superior companies whose characteristics include fortress-like balance sheets and high profitability buttressed by abundant free cash flow and strong organic revenue growth. They cast their lines into a higher-quality pond from the start--one that's easily replicable by anyone with a historical stock database. The team's forte, however, is discerning which historically prosperous firms have the business models, market positions, and executive leadership that can fuel steady earnings and cash flow growth over the next multiyear horizon."

Although it received a higher Process rating than T. Rowe Price New Horizons, Polen Growth's fees are less attractive, and that's why it's rated Silver rather than Gold. Outside of fees, though, it's hard to find fault.

A greater emphasis on fees naturally helps very cheap index funds, and Vanguard Total World Stock Index VTWAX is one of those funds. We raised it to Gold from Silver, though the fund's High Process, Above Average People, and High Parent Pillar ratings were unchanged from our previous report. There's plenty to like here with a 10-basis-point charge for a sensible market-cap-weighted index. The fund's benchmark is the FTSE Global All-Cap Index, which tracks all stocks in the world and weights each based on free-float-adjusted market cap. It targets names that fall in the top 98% of each country's market cap. The result is a low-turnover, very dependable strategy.

The other big winners in our ratings revamp were actively managed strategies in categories with high return dispersions. There, our methodology changes were more forgiving of costs. Thus, a strategy like Hartford Healthcare HGHAX got an upgrade to Silver from Bronze while its pillar ratings were unchanged. Run by Wellington's Jean Hynes, Ann Gallo, and Robert Deresiewicz, the strategy rates a High for People and Above Average for Process. The fund's A shares charge 1.31% in expenses. That's no bargain, but healthcare funds have produced some big returns, and that was enough to get this one into Silver territory. There's a lot to like: Management looks for innovative companies but keeps valuations in mind. The portfolio is an appealing mix of pharmaceutical giants alongside promising biotech stocks.

Dodge & Cox Global Bond DODLX is a fund that we liked right away, but we gradually raised it to Gold from Bronze over recent years. We knew Dodge could manage a bond fund, as it's done a strong job with Dodge & Cox Income DODIX. Also, it has done a fine job buying stocks overseas, as shown by the record of Dodge & Cox International DODFX. Yet, we wanted to see the firm's abilities at selecting foreign bonds as well as managing currencies, an important element for world-bond funds.

The strategy now rates quite highly across the board: High for Process, Above Average for People, and High for Parent. Management emphasizes corporate bonds in order to make the most of its large analyst staff of stock and bond analysts, which has resulted in a strategy that has outperformed dramatically during credit rallies.

The firm's pricing policy is unusual in that it charged a great price right away rather than waiting for assets to grow. This fund charged 0.60% to start, and the fee is now 0.45%. Quite a bargain.

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