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A New Year, a New Month of Analyst Rating Changes

Morningstar analysts rated 1,268 share classes and vehicles and 110 unique strategies in the first month of 2020.

Securities In This Article
Fidelity Freedom Index 2030 Investor
American Funds ST Bd Fd of Amer A
T. Rowe Price High Yield
JPMorgan US Equity A
MFS Lifetime 2030 A

Morningstar analysts assigned Analyst Ratings to 1,268 fund share classes, exchange-traded funds, and separately managed accounts/collective investment trusts in January 2020, nearly double the number rated the month prior. Of these, 595 maintained their previous rating, 535 were downgrades, 72 were upgrades, 42 were new to coverage, and 24 were placed under review owing to material changes to their investment teams or processes.

The numbers shrink when we sift out multiple share classes and look at unique strategies. Over January, Morningstar rated 110 unique strategies, all of which had at least one distinct investment vehicle type that had been previously covered by a Morningstar analyst. Below are highlights of the upgrades and downgrades over the period.

Upgrades The Fidelity Freedom Index Funds (FXIFX for the 2030 vintage) implement a sound, research-driven approach at a low cost to investors, supporting our confidence in their future and driving a Process Pillar rating upgrade to Above Average from Average and an overall Morningstar Analyst Rating upgrade to Silver from Bronze across the series and its share classes. The strategy was launched in 2009 as an index-based alternative to Fidelity's legacy Freedom series, and its managers utilize the same sensible approach that drives strategic allocations across the firm's other target-date offerings. A combination of quality management and Fidelity's deep asset-allocation team supports the effort, though this strategy eschews some of the broader tools used elsewhere in favor of a strict focus on index-based building blocks. Yet the process remains solid, and low fees provide a structural advantage.

Though the strategy lost long-tenured manager Mark Vaselkiv at the end of 2019, we upgraded the cheaper share classes of T. Rowe Price High Yield PRHYX to Silver from Bronze, owing to a winning combination of a strong team, steady process, and competitive fees. Its more expensive share class maintains a Bronze rating. Vaselkiv successor Rodney Rayburn was named to the strategy in early 2019 and has a limited public record, but his history of working with Vaselkiv behind the scenes and the strength of the supporting cast keep our confidence in the team high. The quality of fundamental credit research across the strategy's opportunity set and solid portfolio positioning have aided the strategy in outperforming peers during periods of both market stress and strength.

Vanguard Total World Stock ETF's VT tiny fee and comprehensive portfolio make it tough to beat over the long run, earning the strategy an upgrade to Gold from Silver for all open-end share classes and the related ETF. The strategy tracks the FTSE Global All Cap Index, which includes more than 7,500 stocks of all sizes across developed and emerging markets. Unlike most competitors in the Morningstar Category, which have roughly 25% of assets in its top 10 holdings, the managers here almost fully replicate their diversified benchmark and weight names in the index by their market capitalization. This approach, while potentially increasing exposure to expensive stocks when investors run up prices in an area of the market, it also keeps turnover low. Expense ratios on all the strategy's constituent share classes and ETF are among the lowest in the category and should continue to provide a long-term edge.

Downgrades Though JPMorgan U.S. Equity JUEAX continues to benefit from a strong team and sound stock-picking process, its execution through a multisleeve approach reduces its level of differentiation versus its benchmark and its potential to outperform, warranting an Analyst Rating downgrade of the strategy's cheaper share classes to Bronze from Silver and its more expensive classes to Neutral. The strategy aims to capitalize on the depth of the firm's 24 equity analysts, who manage 25% of the portfolio alongside comanagers Scott Davis and Susan Bao, who manage the rest. This multisleeve approach is designed to outperform via incremental contributions from numerous small stock bets, but it hasn't provided an edge over the long term, warranting a Process Pillar rating downgrade to Average from Above Average. Competitive fees and a strong team remain an edge for the strategy in its cheaper iterations, but not so through its more expensive vehicles.

Uncompetitive fees across share classes erode the MFS Lifetime target-date series' (MLTAX for the 2030 vintage) advantages that otherwise stem from a diversified lineup of well-regarded underlying funds, warranting an Analyst Rating downgrade to Neutral from Bronze on its cheaper share classes, while its pricier share classes carry a Negative rating. The standout quality of the series' 29 underlying offerings, including several Morningstar Medalists, continues to be one of its strongest features. Yet, while the managers responsible for strategic allocation on the strategy are experienced, their process lacks the sophistication employed by some rivals. Despite the broader firm's commitment to lowering fees to keep active management at a reasonable price, pricing across the series runs higher relative to the competition.

In early 2019, evidence of multiyear improvements to Capital Group's fixed-income process and resources earned American Funds Short-Term Bond Fund of America ASBAX a Bronze rating, which was an upgrade from the year prior. But a year later, our new ratings methodology's greater emphasis on fee-adjusted alpha limits the strategy's cheapest share classes to a Neutral rating and its most expensive to a Negative. Consistent with the goal of providing a highly liquid safe-haven fund, comanagers John Queen, Ritchie Tuazon, and Vincent Gonzales invest in a high-quality core mix of U.S. Treasuries and government mortgage-backed securities, complemented with modest allocations to investment-grade corporate debt and asset-backed securities. Though the strategy's cautious approach has assisted it during tough periods for credit, it has struggled to keep up with category rivals over longer trailing time periods.

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About the Author

Gabriel Denis

Senior Analyst
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Gabriel Denis is a senior manager research analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Denis assists with parent research and is a member of the global parent ratings committee, which oversees the assignment of Morningstar Parent Pillar ratings for all investment managers under coverage. Additionally, he helps coordinate environmental, social, and governance research and is a member of the ESG Commitment Level ratings committee.

Prior to his current role at Morningstar, Denis focused on fixed-income strategies and published research on sustainable bond strategies and broad taxable fixed-income market trends. Before joining Morningstar in 2016, Denis served with AmeriCorps Vista in Baltimore.

Denis holds a bachelor's degree in history from Johns Hopkins University.

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