Morningstar updated the Analyst Ratings for 1,027 fund share classes, exchange-traded funds, and separately managed accounts/collective investment trusts in February 2020. Of these, 670 maintained their previous rating, 205 were downgrades, 84 were upgrades, 59 were new to coverage, and nine were put under review because of material changes, such as manager departures.
Sifting out multiple share classes and vehicles, Morningstar rated 244 unique strategies in February. Of these, five received a rating for the first time, with the rest having at least one investment vehicle type that was previously covered by a Morningstar analyst. Here are some highlights of the upgrades, downgrades, and new coverage for the period.
Upgrades FMI International's FMIJX unique, high-conviction, and contrarian approach underlies its High Process Pillar rating and its Analyst Rating upgrade to Gold from Silver across both share classes. CIO Patrick English leads the 10-person management team using a value-oriented, committee-based approach to build a concentrated benchmark-agnostic portfolio that hedges its non-U.S. currency exposure. The team seeks stocks trading at significant discounts to their estimated intrinsic values and holds on to them for about five years, often through rough patches. However, the fund has provided superior downside protection in market corrections, which gives it an edge over full market cycles.
TIAA-CREF Bond's TIBDX strong investment team and value-driven process moved its cheaper share classes to Silver from Bronze under the updated Morningstar Analyst Rating methodology. Joe Higgins, a 25-year firm veteran, has rewarded investors in a variety of market environments with his conservative relative value approach. After the merger of TIAA Investments and Nuveen Asset Management in 2018, the firm formed a new leadership team and investment committee to help keep the large combined squad on track and to share investment ideas. The team focuses on investment-grade securities, which keeps the portfolio on the conservative end of the intermediate core-plus bond Morningstar Category and buoys the fund in times of credit market stress.
New manager Sam Polyak's impressive experience and strong supporting cast earned Fidelity Advisor Emerging Markets FIMKX a People Pillar rating upgrade to Above Average from Average and an overall Analyst Rating enhancement to Bronze from Neutral for its cheapest share classes (the more expensive share class remained Neutral). Even though Polyak is new to the fund, he has 20 years of experience as an emerging-markets analyst and manager, and since 2014 he has led a clone of this strategy available in Fidelity's target-date series. Polyak runs a concentrated portfolio but emphasizes corporate governance, investing in both core holdings and opportunistic, out-of-favor names. This balanced approach has helped shield investors capital in drawdowns.
New to Coverage The Nuveen ESG Model Portfolio Series of separate accounts debuted with a Neutral rating. The series, available to financial advisors as a model portfolio, features low fees and an experienced asset-allocation team led by John Cunniff and Steve Sedmak. The managers apply a process that first screens out certain industries and then targets the top 50% of companies within each sector according to a ranking system using MSCI's environmental, social, and governance ratings and company carbon emissions. While the methodology for investing in sustainable companies is sound, this process is relatively new and untested.
Downgrades Goldman Sachs Absolute Return Tracker GJRTX employs a systematic process to provide the returns of the hedge fund universe, in aggregate. However, its high correlation to global equities limits its diversification potential, warranting a rating downgrade to Neutral from Bronze on its cheaper share classes. Its expensive C shares get a Negative rating. The strategy seeks to provide hedge fund "beta" by using market factors and alternative risk premiums to mimic the return profile of equity long-short, macro, event-driven, and relative value hedge funds. While the approach provides exposure to a variety of typically uncorrelated hedge fund strategies, in aggregate, the fund's returns maintained a high 95% correlation to the MSCI World Index over the past five years through December 2019.
IShares MBS ETF MBB moved to Bronze from Silver after its first run through Morningstar's new rating methodology. While this fund is a solid low-cost option, there are even cheaper alternatives within the intermediate government-bond category. James Mauro and Scott Radell run this strategy with BlackRock's extensive resources. The fund tracks the Bloomberg Barclays U.S. MBS Index and only includes issues with at least $1 billion outstanding and have a weighted average maturity of at least a year. Since the fund only includes mortgage-backed securities issues, it contains more credit risk than its category peers. Most of the portfolio is in AAA rated debt, though, and the fund outperformed the category average during the trailing 10 years through December 2019.
Gabelli Equity Income's GABEX Process rating dropped to Low, dragging its Analyst Rating to Negative from Neutral for all share classes. Lead manager Mario Gabelli, 77, is the chairman and CEO of parent company Gamco Investors and the sole manager of eight strategies, leading to concerns over succession and being spread too thin. Gabelli runs a reasonable value-oriented approach, but a flawed distribution policy undermines its merit. The strategy delivers a $0.10-per-share monthly distribution, which reduces a shareholder's cost basis, erodes principal, and inflates the fund's apparent yield. All of the fund's share classes land in the large-blend category's costliest fee quintile, further limiting their ability to outperform.