Sometimes no single alteration, such as a new manager or strategy, triggers a Morningstar Analyst Rating change. Over time, some funds simply show they deserve a higher or lower rating. Short- to intermediate-term past performance is a poor guide to future results, but longer-term track records do contain some useful information about the character and efficacy of a manager's approach. When managers' 10- or 15-year histories start indicating that they may be better or worse than their ratings indicate, it's hard to ignore. The following recent Analyst Rating upgrades and downgrades include several situations in which long-term performance caused Morningstar analysts to re-evaluate their recommendations, as well as the usual amount of reratings due to clear fundamental changes.
Third Avenue Small Cap Value (TASCX) has shifted to Neutral from Bronze because it hasn't lived up to expectations. Third Avenue's brand of deep-value investing has always required patience, but poor stock-picking and ineffectual process tweaks have "worn away the good will built upon the fund's association with famed investor Marty Whitman and the firm's storied approach to value investing," writes Morningstar senior fund analyst Janet Yang
The formerly Silver-rated FPA Paramount (FPRAX) is starting over with a Neutral rating, too, because it has a new management team and strategy. The fund that went from a domestic small- and mid-cap fund to a global one in 2011 shifted gears again this summer. It dropped its quality-growth strategy and adopted a global-value approach; it also promoted two comanagers, Greg Herr and Pierre Py, to replace longtime lead managers Eric Ende and Steve Geist.
Janus Overseas' (JAOSX) rating was adjusted for risk, slipping to Bronze from Silver. Manager Brent Lynn has posted impressive absolute returns in his more than 10 years in charge, but the chances he often takes to produce them--big emerging-markets stakes and leveraged turnaround stories, for example--have worked against the fund in recent years. Lynn invests with flair and conviction, but the fund is an acquired taste.
T. Rowe Price Short-Term Bond's (PRWBX) rating slipped to Silver from Gold. While the fund has a veteran manager, consistent process, competitive fees, and strong corporate culture, its returns over the 18-year tenure of manager Ed Wiese slightly lag its index, the Barclays 1-3 year U.S. Government/Credit Bond Index. It's still a solid fund.
Poor recent performance and strategy changes contributed to Fidelity Advisor Mid Cap II's (FIIAX) downgrade to Bronze from Silver. Manager Thomas Allen has responded to a post-2008 slump by dramatically increasing the number of stocks in the portfolio, capping holding sizes, and relying on quantitative tools more than he has in a few years. Granted, Allen posted fine performance early in his tenure at the fund using a similar style, and he has shown skill at a similar variable annuity he has run since 2001. But it's not clear whether going back to his roots will work well in a different market environment.
Vanguard High-Yield Corporate (VWEHX) gets high marks for low fees and culture, but after a closer comparison with other high-yield funds that lean toward higher-quality bonds, its process didn't seem to offer a significant competitive advantage. It now has a Bronze rating rather than a Silver one.
A finer appreciation for longtime manager Bruce Baughman's experience and discipline at the closed Franklin MicroCap Value (FRMCX) led to an upgrade to Silver from Bronze. Baughman's focus on financially sound tiny-caps whose shares trade below the companies' tangible book values has produced excellent long-term returns with less volatility, which isn't easy in the fickle micro-cap area.
Morgan Stanley Institutional U.S. Real Estate's (MSUSX) rating moved to Silver from Bronze. Its intermediate-term results look mediocre, but the fund's returns over its 18-year life--and manager Ted Bigman's tenure--remain very strong. Bigman has stuck with his value-oriented strategy through good times and bad, and he has a reasonable expense ratio working in his favor.
FMI Focus (FMIOX) learned the dangers of asset bloat the hard way--but it did learn, so its rating has increased to Silver from Bronze. Assets here doubled to $1.2 billion in 2004 because of strong performance and inflows; but rather than close to new investors, the small- and mid-cap fund just started buying more stocks and relying more on macro calls--not its forte. A bout of mediocrity and outflows jolted manager Rick Lane and his team to their senses; they refocused the portfolio and now promise to shut the fund if new money threatens to swamp its process again. That's good, because when Lane and his colleagues have stuck to building a compact portfolio of solid companies trading below the managers' private market-value estimates, the fund has been very good.
Another year of solid results with a disciplined process that is focused on identifying foreign companies with accelerating earnings boosted American Century International Growth's (TWIEX) rating to Bronze from Neutral. Both expenses and turnover could be lower, though.
Lord Abbett Floating Rate (LFRAX) has seen a lot of manager changes since its inception, which contributed to its former Negative rating. Current lead Jeff Lapin seems to have settled in, and turnover at Lord Abbett overall has settled down. So this fund now gets a Neutral rating and a fresh slate to show what it can do.
Oppenheimer Commodity Strategy Total Return (QRAAX) has a dismal long-term record, but the fund also is getting a fresh start. It got a new manager, strategy, and benchmark in 2013, so it's not the same fund that earned its previous Negative rating. It's a Neutral for now until George Zivic, who joined the firm and took over the fund in April 2013, builds a track record with a more active strategy that will use the less-energy-centric Dow Jones-UBS Commodity Index as its baseline for exposure to various commodities. It is too soon to say if this is a good or bad change.
For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.
Dan Culloton does not own shares in any of the securities mentioned above.
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