Morningstar issued Analyst Ratings for 641 fund share classes, separately managed accounts/collective investment trusts, and exchange-traded funds in December 2019. Of these, 311 maintained their ratings, 194 were downgrades, 76 were upgrades, 31 were new to coverage, and 29 were placed under review because of material changes, such as manager departures.
Not counting every share class and vehicle, Morningstar's analysts rated 156 unique strategies in December. Of these, six were truly new to coverage, with new share classes of previously rated strategies accounting for the rest of the new ratings. Here are some highlights of the upgrades, downgrades, and new coverage.
Upgrades A decade of sound execution earned Bernzott Capital U.S. Small Cap Value's compact team a People Pillar upgrade to Above Average and an overall Morningstar Analyst Rating improvement to Bronze for its SMA. In 2009, this strategy broadened its universe beyond dividend-paying stocks to profitable companies with recurring revenues and manageable debt loads whose shares look cheap relative to cash flow. Though it has been less volatile than its benchmark, the concentrated portfolio still can court risk. Some concerns also linger over how the team's focused style, penchant for smaller, less-liquid stocks, and reliance on old-fashioned investment gumshoe work will scale if or when the strategy's $560 million asset base grows. Managers Thomas Derse, Scott Larson, and Ryan Ross, however, have demonstrated stock-picking skill over a long time period.
The Analyst Ratings of BlackRock Total Return's MAHQX cheaper share classes moved to Gold from Silver after its first run through Morningstar's enhanced Analyst Rating methodology. Increased confidence in the thoroughness of the strategy's all-encompassing process and the depth and breadth of its personnel and technological resources underpin the fund's High People and Process ratings and overall upgrade. BlackRock has invested heavily in its fixed-income platform since lead manager and global fixed-income CIO Rick Rieder arrived in 2009; it now comprises hundreds of investors across the world and hard-to-match tools, such as the firm's industry-standard-setting Aladdin risk management and portfolio management operating system. Rieder and comanagers Bob Miller and David Rogal tap these means to implement a subtle approach that incorporates sophisticated top-down research and meticulous bottom-up security selection.
Steady implementation of a reasonable approach gained Janus Henderson Balanced JBALX a new, upgraded Above Average Process rating and an Analyst Rating upgrade to Bronze for its cheapest share classes. Frequent changes among the managers running the fixed-income portion of this old-school stock and bond portfolio limit its People rating to Average, but the moderate growth stock-picking style of long-tenured equity manager Marc Pinto and the first-do-no-harm bond-sleeve approach have won increased confidence. The managers can shift the strategy's equity holdings between 35% and 65% of assets based on the best valuation opportunities, but its asset-allocation moves have not been hasty or arbitrary. The 2020 arrival of new fixed-income manager Greg Wilensky creates some uncertainty, but the strategy's philosophy and methods should stay the same.
Downgrades Goldman Sachs High Yield's GSHIX People and Process ratings dropped to Below Average and dragged its Morningstar Analyst Rating to Negative for all its share classes. The strategy's process doesn't stand out, it's seen a lot of manager changes, and it has posted desultory performance. The process attempts to create an all-weather portfolio with a combination of bottom-up and top-down research. While lagging like most quality-leaning portfolios do in high-yield rallies, it has failed to deliver much downside protection, and security selection has been mediocre. Current manager Robert Magnuson has been the lead only since September 2019 and a named comanager since 2014. There has been a fair amount of personnel movement in the research ranks around the team, too.
Vanguard Balanced Index VBINX is a solid, proven strategy whose simple, index-only, 60/40 portfolio has defied predictions of its obsolescence for years. Its sole reliance on U.S. total stock market and bond market indexes, however, limits its diversification options and renders it marginally less attractive than more-wide-ranging rivals. So, though you could live a long and happy life and sleep well at night with this as a core portfolio holding, its Process rating and headline Analyst Rating for all its U.S. share classes dropped to Average from Above Average and to Silver from Gold, respectively.
A key manager departure led to the downgrades of several J.P. Morgan strategies overseen by the family's U.S. behavioral finance group. The firm fired Dennis Ruhl, the group's former CIO and a portfolio manager on JPMorgan Intrepid Growth JPGSX, JPMorgan Intrepid Mid Cap WOOPX, JPMorgan Market Expansion Enhanced Index PGMIX, JPMorgan Small Cap Core VSSBX, and JPMorgan U.S. Small Company JUSSX. The funds have struggled in recent years, but Ruhl was an integral member of the group and helped develop and evolve the quantitative models it used as part of its processes. Other changes rippled through the team as a result of Ruhl's departure; team members and quant analysts Wonseok Choi and Jonathan Tse, for example, became comanagers. Though the managers are familiar with the process that adds a modicum of fundamental verification to its quantitative models, it's not clear if this change is the end or beginning of larger changes. Each of the strategies' Analyst Ratings dropped to Neutral from Bronze for all share classes.
New to Coverage BlackRock Managed Income BLDIX debuted with a Bronze rating for its cheapest share classes. It has a proven management team in comanagers Michael Fredericks, Justin Christofel, and Alex Shingler, who also have achieved success at Silver-rated BlackRock Multi-Asset Income BIICX since late 2011. This fund follows a more conservative iteration of Multi-Asset Income's flexible approach, paying even more attention to limiting both volatility and the downside as it shoots for a stable income of around 3.5% annualized for the institutional share class. It has tended to have an equity weighting below the Morningstar Category average, but more credit exposure; yet it still has kept variability tolerable while hitting its income target.
Polaris Global Value PGVFX started off with a Bronze rating for its only share class. Firm founder and veteran investor Bernard Horn has run this fund since its 1998 inception, but he has groomed a decent support team of three assistant managers, and potential successors, in recent years. They now implement Horn's conservative value approach as a unit, using screens and bottom-up research to locate solid companies whose share prices lowball their ability to generate cash over the long term. It's a diversified, but distinctive, portfolio that doesn't ape the MSCI World Index's region, country, or sector weightings. Its value style has been out of favor in recent years, but long-term results remain strong.