Why We Downgraded These 4 Funds

Execution and risk management are two key components that flow into our Process Pillar assessments. Are ideas implemented efficiently? Do portfolio managers have proper oversight to ensure investors aren’t subjected to potential unintended risks?

There are myriad other factors at play when evaluating strategies’ processes. Here are four funds whose Process ratings were downgraded by Morningstar analysts this year.

T. Rowe Price Communications & Technology

Daniel Shear took over as T. Rowe Price Communications & Technology’s PRMTX lead manager in March 2025 after the fund’s previous skipper was tapped to take over T. Rowe Price Growth Stock PRGFX. While Shear’s time as a communications sector analyst should bode well for the fund’s future, he was the only named as comanager in January 2025, which gives us pause, as does the fund’s history of occasionally drifting outside its primary opportunity set of technology and communications stocks, given Shear’s inexperience with these tangential sectors.

We downgraded the fund’s People and Process ratings in January 2025, both to Average from Above Average. Shear must get up to speed on several stocks that he hasn’t previously covered. He also needs to hone his approach to critical areas of portfolio management, such as position sizing and risk management. The double downgrade dropped the fund’s Morningstar Medalist Rating to Bronze from Gold.

Vanguard Real Estate Index

We downgraded Vanguard Real Estate Index VGSLX in January 2025 because of the structural challenges facing index funds in the real estate Morningstar Category. The fund’s mixed results versus its active counterparts back this up and support what we view to be a diminished opportunity to effectively index in the real estate asset class, especially relative to the more efficient, broader segments of the stock market. We lowered the fund’s Process rating to Above Average from High in January 2025, leading to a one-notch downgrade in its Medalist Rating to Silver from Gold.

MFS Global Equity

The thoroughness with which the managers of MFS Global Equity MWEFX evaluate opportunities before entering positions may have some unappealing trade-offs. The managers of this low-turnover approach look to identify firms with competitive advantages, strong management, and durable earnings-growth rates, among other fundamentally appealing qualities. These screens and others, along with the managers’ desire to pay what they believe to be a reasonable price for these stocks, make for a high bar. That has historically led to the portfolio building core positions and letting them ride, resulting in low annual turnover of 5% to 20%. Even though we believe this approach remains sound, the team’s unwillingness to move quickly into new ideas is concerning. This issue has come up multiple times over the years, particularly with names in the IT sector.

We are still optimistic about the fund’s long-term prospects. After receiving a March 2025 Process downgrade to Above Average from High, the fund’s Medalist Rating fell to Bronze from Gold.

Alger Small Cap Focus

Team instability and questions surrounding risk controls have lowered our confidence in Alger Small Cap Focus AOFAX. Manager Amy Zhang defines small companies as those with operating revenue up to $500 million. The portfolio’s concentration in the technology and healthcare sectors occasionally raises eyebrows, as does its lofty valuation metrics, such as the price/earnings ratio. We downgraded its Process rating in part because a number of holdings do not meet Zhang’s stated tests for revenue and competitive strength; she regularly allocates to early-stage biotechnology companies, sometimes with sizable positions. These concerns have eroded the strategy’s edge, in our view. We downgraded its People and Process ratings to Average from Above Average in April 2025, which dropped the Medalist Rating to Neutral from Bronze.

This article first appeared in the June 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.