Why We Upgraded This High-Yield Bond Fund

The recentering of American Funds American High-Income’s AHITX investment guidelines helped the strategy earn a Process Pillar upgrade to Above Average from Average. That lifted the Morningstar Medalist Rating of its A shares, which hold half the strategy’s assets, to Bronze from Neutral; and the rating of its cheapest R6 shares, which hold a fifth of the assets, to Silver from Bronze.

David Daigle, who became the fund’s principal investment officer in April 2018, has steered this high-yield strategy toward a midquality focus within the bond universe, a shift from its previous higher-risk posture. Before this recentering of the portfolio, the fund’s income focus led to significant allocations to emerging-markets sovereign bonds and overweight positions in CCC rated debt. That approach led to underwhelming performance, prompting Daigle to seek improvement through altering the portfolio’s internal guidelines.

By late 2020, Daigle worked alongside Capital Group’s risk and quantitative solutions team to introduce tighter fund-level rules relative to the Bloomberg US High Yield 2% Issuer Capped Index, reducing volatility while preserving flexibility for managers to explore promising investments. The guidelines limit exposure to bonds rated BB and above and much riskier debt rated CCC- and below, cap the amount of equity that can be acquired through restructurings, and ensure the fund’s duration aligns closely with that of the benchmark.

The fund benefits from its managers’ varied investment styles. Daigle and Tara Torrens prioritize issuer fundamentals, with Daigle favoring lower-rated bonds. Former trader Thomas Chow capitalizes on relative value shifts, frequently adjusting his holdings, while Shannon Ward maintains a benchmark-aware approach, carefully managing her portfolio’s ratings mix.

Key Morningstar Metrics for American Funds American High-Income

Morningstar Medalist Rating: Bronze

Process Pillar: Above Average

People Pillar: Above Average

Parent Pillar: High

High-Volatility Challenges Outperformance Potential

Fidelity Leveraged Company Stock’s FLVCX mandate reflects the inherent risks associated with targeting leveraged equities, which typically introduce excess volatility and a higher hurdle for outperformance, resulting in a Process Pillar downgrade to Below Average from Average. That, in turn, caused the Medalist Rating to drop to Neutral from Bronze.

Managers Mark Notkin and Brian Chang use their expertise in high-yield securities to identify firms with growth potential to mitigate concerns about leveraged balance sheets, typically defined as a debt/EBITDA above 1 and credit ratings of BBB- or below. Their approach includes selecting firms with strong management, low capital needs, and near-term catalysts to support debt repayment. However, the strategy’s focus on leveraged firms inherently restricts investment in financially healthier options, which limits risk management. Consequently, while the fund may yield high returns, its high volatility and structural constraints create a higher hurdle to outperform on a risk-adjusted basis.

Key Morningstar Metrics for Fidelity Leveraged Company Stock

Morningstar Medalist Rating: Neutral

Process Pillar: Below Average

People Pillar: Above Average

Parent Pillar: Above Average

Execution Falls Short

Challenging outcomes from a new manager dropped T. Rowe Price Institutional Emerging Markets Equity’s IEMFX Process Pillar rating and overall Morningstar Medalist Rating a notch in October.

Eric Moffett, who succeeded former manager Gonzalo Pangaro in 2022, has pursued growth opportunities across sectors with conviction, often building large positions where he sees potential. Moffett reallocated to technology stocks from discretionary stocks and diversified the geographic focus, particularly in Latin America and smaller Asian markets. However, efforts to add value through security selection in major markets like China and India have fallen short, and Moffett’s attempts to mitigate macroeconomic impacts through portfolio adjustments have yet to yield the desired results, casting doubt on the effectiveness of his execution.

Key Morningstar Metrics for T. Rowe Price Institutional Emerging Markets Equity

Morningstar Medalist Rating: Bronze

Process Pillar: Average

People Pillar: Above Average

Parent Pillar: High