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Expanded Ratings Activity in November

With the advent of our new ratings methodology, November saw far expanded numbers of upgrades and downgrades compared with previous months.

November saw the inauguration of Morningstar’s newly enhanced methodology for the Morningstar Analyst Rating for funds. Among several enhancements, we have shifted from assigning one rating to all a fund’s share classes to assigning unique ratings to each share class of a strategy based on their respective fee level.

Our manager research analysts assigned ratings to 198 strategies over the month of November, including 179 open-end funds, 14 exchange-traded funds, and five collective investment trusts. Of these strategies, three were new to coverage while the remaining 176 had been rated previously. However, while the number of strategies rated over the month of November is in line with previous months, the total number of ratings issued jumped as we started to rate funds at the share-class level.

Over November, a full 1,707 separate share classes were assigned unique ratings. Of the share classes that had ratings under our previous methodology, 1,085 saw their ratings maintained, 75 saw upgrades, and 359 saw downgrades. A further 49 were put Under Review owing to unexpected team or process changes. Below, we take a look at highlights from November’s ratings activity.

Upgrades Increased conviction in the cautious approach driving Franklin Small Cap Value FRCSX helped its two cheaper share classes earn a Morningstar Analyst Rating upgrade to Bronze from Neutral. Its three more expensive share classes, however, maintained their Neutral ratings. Lead manager Steven Raineri and his team scan for smaller, less-leveraged names with a potential to outperform over downturns. The team's cautious relative value approach, reflected in below-average portfolio turnover and average debt/capital ratios, received a Process Pillar rating upgrade to Above Average from Neutral.

Although the underlying pillar ratings driving JP Morgan Core Plus Bond's JCPUX overall ratings did not change, the fund's cheapest share classes saw an upgrade to Silver from Bronze. The dispersion on the fund's distribution channels was significant, however, with ratings ranging from Bronze to Neutral on the fund's more expensive share classes. Parent JP Morgan has invested significantly in increasing collaboration between its various teams since 2013, and this strategy benefits from the successful marriage of strong security selection with a macro overlay. Despite carrying extra credit risk compared with the typical rival in the intermediate core-plus Morningstar Category, the broad and experienced team's successful positioning calls have helped it outperform its typical peer with less volatility.

Downgrades An announced departure of an experienced contributor to Vanguard GNMA VFIJX led to downgrades of the strategy's cheaper share class to Silver from Gold and its more expensive share class to Bronze. This strategy, the largest in the intermediate government Morningstar Category with assets under management of USD 24 billion as of October 2019, has long benefited from a steadfast and value-leaning approach primarily focused on GNMA mortgage pass-throughs that look cheap relative to their likely cash flows. Yet the impending departure of longtime manager Michael Garrett in June 2020 led to a downgrade of the fund's People Pillar rating to Average from Positive, and the team he leaves behind is relatively thin and short-tenured compared with peers.

Fidelity Balanced FBALX has seen extensive turnover among the managers of its sector sleeves, contributing to a downgrade of all the fund’s share classes to Neutral from Bronze. A sizable contender in the allocation--50% to 70% equity Morningstar Category with USD 35 billion in AUM, the strategy is led by longtime manager Robert Stansky, and eight equity and four fixed-income sector managers drive positioning of the portfolio’s roughly 60%/40% allocation to stocks and bonds. Yet six equity managers have been replaced over the past five years, and the performance of the fund’s equity sleeve has failed to stand out against its S&P 500 bogy. Although the strategy’s tendency to overweight stocks has boosted returns relative to its peers, this outperformance comes at the cost of elevated volatility compared with its typical rival.

New to Coverage Davis International's DILYX skilled stock-picker Danton Goei and modest fees merit a Morningstar Analyst Rating of Bronze for its cheapest share class while its pricier offerings get a Neutral. Goei has amplified the portfolio's risks since taking sole charge in 2016, which means this fund's results will differ significantly from those of the benchmark. His talents, though, should help the fund stick out in a good way over the long term, but investors will need tolerance for volatility to succeed here.

PGIM Jennison Global Opportunities PRJZX has a bit more dispersion among its share classes, with its cheapest share classes earning a Silver while its more expensive options range from Bronze to Neutral. The strategy is the brainchild of veteran managers Mark Baribeau and Tom Davis, who joined subadvisor Jennison Associates in 2011 to lead and advance the firm’s research of foreign stocks. Their regional- and sector-unconstrained approach, powered by the firm’s capable analyst bench, has delivered impressive (if volatile) returns since the strategy’s mid-2012 inception.

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