4 Big Fund Upgrades and Downgrades

Jeremy Glaser: From Morningstar I'm Jeremy Glaser. I'm here today with Russ Kinnel, he's the editor of Morningstar's FundInvestor newsletter. We're going to look at some recent upgrades and downgrades that we've seen from our manager research team.

Russ, thanks for joining me.

Russ Kinnel: Glad to be here.

Glaser: You recently wrote a cover story for FundInvestor looking at some notable upgrades and downgrades for larger funds. We are going to talk about some of the upgrades first. The first is Fidelity Strategic Income. Why do we have a higher view or a better view of this fund today.

Kinnel: We put a Silver rating on this fund. It's actually new to coverage. This is our first rating. Fidelity has got a really deep team here. This is a fairly high-risk strategy. It's a multisector bond fund, meaning it's got a big chunk in high yield, emerging-markets, high-yield bank loans and then some more conservative holdings in addition. You've got high risk in terms of issue selection and then also you've got allocation because they are adjusting among those different types. That's a challenging job, but they've done a really good job of it, and we really think highly of the team, reasonable expenses. It's a high-risk fund, but we have a lot of confidence in the managers.

Glaser: Another upgrade was MFS Value, what changed there that improved our opinion?

Kinnel: Really this case is an example of a fund where really nothing has changed, it's more just growing confidence, growing evidence. Steve Gorham and team have been there for a while. We really like their value strategy. It's kind of value with a quality tilt, which means it gives a it little bit of a defensive nature. Hasn't been doing that well, really value relative to growth hasn't been doing that well. But if you look at the long term record it's really strong. MFS has a very deep analyst staff that we like. This is just a solid fund that's gradually growing in our esteem, really no actual change we can point to.

Glaser: Let's look at some downgrades then. The first is Oppenheimer Global. What's changed here or why are we less confident in this fund strategy?

Kinnel: Oppenheimer is really a firm where their international funds are pretty strong. But you see a lot of key-man risk, because typically you have one manager with a small analyst staff and not a lot of support behind them. In this case Rajeev Bhaman is going to retire next year, and the people coming in place of Bhaman are good but they don't have the track record. They really were not in charge before, and so we've taken the fund down to Neutral because of that. When an Oppenheimer manager retires its really a big deal. Of course the background there is a report that Oppenheimer maybe purchased by Invesco. Who knows if that would even affect the fund. The deal hasn't even been announced so again fairly speculative there, but we do know Rajeev Bhaman is retiring.

Glaser: Another downgrade is a Fidelity fund, Fidelity Puritan. What's happening here?

Kinnel: Ramin Arani is the manager at this fund, and he's really done a great job both in terms of he does the equity selection and the allocation selection. He's going to retire at the end of this year. His replacement is someone who we rate his equity fund Neutral, but also he doesn't have any experience with allocation. The fund is mostly equities but also has some in fixed income, and the new manager will be in charge of deciding what that allocation is. Really a couple of question marks there. We don't expect the strategy to change but will the execution be as good, we have questions. This is why we have lowered it Neutral.

Glaser: Russ, thanks for the updates today.

Kinnel: Glad to be here.

Glaser: From Morningstar I'm Jeremy Glaser. Thanks for watching.