In March 2021, Morningstar analysts updated Analyst Ratings for 1,476 fund share classes, exchange-traded funds, and separately managed accounts/collective investment trusts. Of these, 1,074 ratings stayed the same, 121 were downgrades, 131 were upgrades, and 131 were new to coverage. We placed 19 entities under review owing to significant changes such as manager departures.
Sorting out multiple share classes and vehicles, Morningstar rated 350 unique strategies during the month. Of these, 25 received a rating for the first time; the rest previously had at least one investment vehicle type with a Morningstar Analyst Rating. Below are some highlights of the upgrades, downgrades, and newly covered funds.
Metropolitan West Unconstrained Bond MWCIX, the fund's institutional share class, rose to a Gold rating to join the fund's cheapest share class, MWCPX. The pricier M class (MWCRX) moved up to Silver from Bronze. Portfolio managers Tad Rivelle, Steve Kane, Laird Landmann, and Bryan Whalen have used a team-based approach since this fund's inception almost 10 years ago. Together they develop a top-down perspective, while sector teams express it with individual positions. It's an unconstrained mandate, so the team can do all sorts of things that more-traditional bond funds can't: build currency positions, adjust duration (even making it negative), and add equity. Compared with its nontraditional peers, however, the team's disciplined flexibility has rarely leaned on these more esoteric abilities. Instead, the managers have generally preferred to lean on credit, the firm's strongest suit, with good results. The managers are not simply standing pat on a successful strategy, however. The Analyst Rating upgrade comes because we lifted the Process rating to High, reflecting the team's recent upgrades. The most notable one came in duration management, which has made the fund more competitive in volatile environments. The result has been good performance against its competitors without as much volatility.
T. Rowe Price Floating Rate's three cheapest share classes (PRFRX, TFAIX, and TRIZX) were lifted to Gold following an upgrade to the People Pillar. They join a few other share classes of the fund at that level; only the more expensive advisor shares (PAFRX) sit a notch lower at Silver. We have long admired the fund's highly selective process. That is, the portfolio's 15 largest issuers made up 25% of the fund at the end of 2020. While a concentrated portfolio can court risk, this team has proved its capability to employ one well on behalf of this fund's shareowners. Paul Massaro has managed the portfolio since its 2011 inception--so this summer he'll celebrate a full decade at the helm. Associate portfolio manager Stephen Finamore assists, as do 17 dedicated leveraged finance analysts--a large staff for this type of portfolio. While there are a lot of bank-loan funds out there, this is the only offering with Gold-rated share classes.
This first downgrade is an unusual case. International Value Advisers announced in March that it would liquidate its two strategies, IVA Worldwide IVWIX and IVA International IVIQX, on or around April 19, 2021. This is a highly unusual move, given that the funds combined still hold roughly a billion dollars, and it comes after significant underperformance drove massive redemptions of these two funds. To a significant extent, the underperformance has been due to lead manager Charles de Vaulx's signature style: a devotion to value over growth, a preference for smaller companies, and a predilection for holding significant cash stakes in the portfolio. In an era when large-growth companies have shot lights-out, such a strategy will struggle--and IVA's funds did. Current shareowners who do not liquidate will receive cash upon liquidation. So, we have downgraded the I and A share classes of both funds to Neutral, where they join the C shares. Investors might as well shift their assets out of the funds now.
Significant personnel changes and performance struggles also brought us to downgrade Franklin Mutual Global Discovery's Analyst Rating to Neutral across the A (TEDIX), R (TEDRX), and Z (MDISX) share classes. In late 2020, CEO and CIO Peter Langerman announced he would step down as lead manager on this fund and retire from the firm in mid-2021. Three other managers at Franklin Mutual Advisers have also departed recently. Christian Correa, a manager of this portfolio since 2018 and now firm president and CIO, will comanage the fund with Katrina Dudley, who is new to the fund but with experience at Franklin Mutual European. Clearly that's a lot of personnel change. In addition, the fund's value discipline, which included 10% to 15% of assets outside equities, historically provided downside protection when stocks dropped. But over the past half-decade, partially because of some missed stock picks and an equity weighting above its norms, the fund has been more volatile generally and less buoyant during downturns. Correa says the equity portfolio may get more concentrated, which could lead to better stock-picking discipline, but our confidence has slipped. Most of the share classes had been rated Bronze, but now all of them are Neutral.
T. Rowe Price Growth Stock ETF TGRW debuted in August 2020, largely mirroring the portfolio and process of mutual fund sibling T. Rowe Price Growth Stock PRGFX. Joe Fath has managed this strategy since January 2014. He plies a sensible and straightforward approach, seeking companies with strong free cash flow, attractive growth prospects, and solid management teams. While the ETF will have essentially the same philosophy and process as the mutual fund, it's important to note that its portfolio won't be a pure clone for two reasons. First, because of the Russell 1000 Growth Index's increasing concentration, the mutual fund is planning to switch to nondiversified status to allow Fath to take larger stakes in the benchmark's top constituents; the ETF must remain diversified. (Given the hefty weightings of the top stocks in the Russell 1000 Index, it's difficult for Fath to overweight them and satisfy the regulatory definition of a diversified fund.) So, the mutual fund may well become more concentrated than the ETF. In addition, Fath likes to hold a small slug of private companies in the mutual fund, but the ETF cannot do so. We don't think this will materially degrade the ETF's prowess. Over the long term under Fath, the strategy has a mixed record, but that period hasn't included an extended downturn, which is when strategies like this one often make up ground on the index and more-aggressive competitors. With a strong parent, seasoned management, and a low 0.52% expense ratio, we see the ETF as a solid option and initiated coverage with a Silver rating--the same as most share classes of its mutual fund sibling.