A Story of 7 Fund Upgrades

This article was published in the April 2016 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

I’ve written a lot about how our Morningstar Analyst Ratings have performed. But I’ve done less about ratings changes. I decided to look at funds we upgraded or initiated at Morningstar Medalist levels between three and four years ago, and then look at the subsequent three-year return. This is not to suggest that these funds give us enough to judge our track record, but I wanted to illustrate how things have worked out since and look at our reasons for raising the rating in the first place. You can see the full analysis at that time by clicking on the Analyst Report Archive tab after selecting fund analysis.

American Funds Capital World Growth & Income

CWGIX

We raised this fund’s rating to Gold from Silver in November 2012, citing its cautious approach to income with lower-yield targets and a greater emphasis on high-quality stocks than other income-oriented funds in the world-stock Morningstar Category. We also liked its management and low fees. The fund has seen some manager changes but has stayed true to its strategy. It has more in wide moats than the income-oriented subset of the world-stock category, and it has outperformed that group by about 100 basis points per year but is very tight with peers and benchmark since.

MFS Global Equity

MWECX

This fund didn’t get its first rating until February 2013, but we started it at Gold right away. At that time, senior analyst Bill Rocco placed great emphasis on the management team led by David Mannheim and comanager Roger Morley. He also liked the disciplined high-quality strategy for its ability to keep up in growth rallies while providing good defense in downturns. All those qualities have remained, including the good defense on display in the first three months of 2016. All told, the fund has modestly outperformed peers and benchmark since.

Fidelity Small Cap Discovery

FSCRX

This was an unusual case in which we raised the rating to Gold from Silver just before the fund closed to new investors in January 2013. Our biggest worry had been that assets would grow beyond manager Chuck Myers’ ability to manage them effectively. So, closing this fund and adding a comanager to Myers’ other fund sealed the deal for us. We already considered Myers a brilliant investor and were later pleased (for this fund’s shareholders) to see his other fund close and plans announced for Myers to gradually turn over that fund to his comanager before stepping down in January 2016. Since the upgrade, the fund has handily beaten peers and benchmark. It’s great to see what happens when one of Fidelity’s best managers is protected from an avalanche of cash.

FPA U.S. Value

FPPFX

We upgraded this fund to Gold from Silver in November 2012, citing strong management, great returns, and a remarkably small asset base. Today the asset base is still small, but management is gone, as is the strategy. The following year FPA made it known that Eric Ende would retire and Greg Herr would take his place alongside Steve Geist. However, Geist then retired in 2014 (spurring a downgrade to Silver) and FPA surprised us by choosing a new manager and shifting the fund’s strategy to value from growth. (The fund’s category moved to large-blend from mid-growth.) That led us to lower the rating to Neutral. The fund’s performance since the upgrade lags the S&P 500 and is right in line with peers, though it’s tough to judge given that the fund drastically overhauled its strategy right in the middle of the period. We try to anticipate manager changes but were surprised by the extent of the changes and the strategy shift.

PIMCO Income

PONDX

Dan Ivascyn’s continued success with his wide-ranging fund spurred us to raise the fund’s rating to Silver from Bronze in November 2013, and we’ve seen little since to dissuade us. In fact, the fund has continued to produce strong results that put it well ahead of benchmark and peers.

Artisan Global Opportunities

ARTRX

This fund is run by the same growth team running

Artisan Small Cap

ARTSX

We raised this fund to Silver from Bronze in March 2013, citing a successful manager transition. Manager Craigh Cepukenas had already been on the fund when Artisan moved him and the fund over to its growth team in 2009. Four years later, we felt like Cepukenas had clicked with the new team. Since then, the team has stayed together, but Andy Stephens stepped down as comanager on this fund after five years. The fund closed to new investors in August 2013. Performance has not been great, though. The fund lags its peer group slightly and its benchmark by about 100 basis points annualized. Healthcare and tech names have hurt so far in 2016, but Cepukenas’ full record remains strong.