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Fund Spy: Morningstar Medalist Edition

Process Concerns Drive the Downgrades of These Funds From Eaton Vance and Vanguard

Here are some highlights from August.

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Morningstar updated the Morningstar Analyst Ratings for 824 fund share classes, exchange-traded funds, and separately managed accounts/collective investment trusts in August 2021. Of these, 613 maintained their prior rating, 28 were upgraded, 68 were downgraded, 99 were new to coverage, and 16 were placed under review because of material changes, such as a significant adjustment to the investment process or a new parent firm following an acquisition.

Looking through share classes and vehicles to underlying strategies, Morningstar issued 173 Analyst Ratings during August. Of these, 10 were new to coverage, and the remainder had at least one investment vehicle that had been previously covered by a Morningstar analyst.

Morningstar also introduced new ratings for 80 Model Portfolios in August.

Below are some of the highlights of the upgrades, downgrades, and funds new to coverage.

Upgrades

T. Rowe Price Global Allocation's (RPGAX) cheapest share classes rose to Gold from Silver following a People rating upgrade to High from Above Average. Over the past few years, T. Rowe Price has beefed up its asset-allocation capabilities, and currently, the multi-asset group stands at more than 80 members, larger than most rivals'. The group's size, coupled with the presence of numerous proven veterans at the top, demonstrates a strong commitment to asset-allocation research and strong execution, and there has been a concerted effort to bring in relevant subject-matter expertise. An eight-member advisory committee also helps with the implementation of the fund's unique underlying strategies; it includes members with backgrounds in alternatives because of the fund's strategic allocation to this asset class. Many of T. Rowe Price Global Allocation's 20 underlying strategies also are Morningstar Medalist funds.

Parnassus Core Equity (PRILX) already had High Process and Above Average People ratings. A small decline in fees in recent years has resulted in an Analyst Rating upgrade to Gold from Silver for both share classes. Managers Todd Ahlsten and Ben Allen employ a time-tested approach, avoiding companies that derive significant revenue from alcohol, tobacco, weapons, fossil fuels, nuclear power, or gambling, and then employing additional environmental, social, and governance, quality, and valuation screens to narrow their investment universe. From there, the managers look for companies with sustainable competitive advantages, increasingly relevant products or services, exemplary management, and ethical practices. Downside protection has been a strength for this fund. The resulting compact portfolio has outperformed the S&P 500 in every market correction over the past 20 years.

Downgrades

Vanguard Extended Market Index's (VIEIX) benchmark construction leads to an unintentional but persistent growth tilt. The fund tracks the S&P Completion Index, which comprises investable U.S. stocks that aren't members of the S&P 500 and can include mega- and large-cap stocks. As of July 2021, the top 10 holdings included many growth names such as Square (SQ), Zoom Video Communications (ZM), DocuSign (DOCU), Twilio (TWLO), and CrowdStrike Holdings (CRWD). In May 2021, the fund was moved to the mid-cap growth Morningstar Category from the mid-cap blend category. But since the strategy does not deliberately target growth stocks like its category peers, we downgraded its Process rating to Average from Above Average because of its unintentional growth tilt. This resulted in an Analyst Rating downgrade for its investor share class to Bronze from Silver, and to Bronze from Gold for the remaining share classes. 

Eaton Vance Income Fund of Boston (EIBIX) continues to boast a strong investment team, but its execution hasn't kept up with nimbler options in the high-yield bond category. The managers lean on their deep analyst bench for credit picks and then apply a macro overlay. This results in a more conservative portfolio, which can lag during market upswings, but it has not performed as well as it once did in credit downturns, prompting a Process rating downgrade to Average from Above Average. The strategy's cheaper share classes dropped to Neutral from Bronze, and its most expensive share class to Negative.

New to Coverage

Morningstar has been rapidly expanding model portfolio coverage in recent months and initiated new ratings for 80 models in August. Among them is the American Funds Growth series (available as model portfolios and mutual funds), which earned an inaugural Morningstar Analyst Rating of Silver, with the mutual funds' more expensive shares landing at Bronze. Two of the portfolios, Global Growth and Growth, are all-equity portfolios that hold six growth-leaning American Funds mutual funds, all of which earn a Gold or Silver rating. It's an impressive lineup that few, if any, other allocation strategies that only use actively managed underlying holdings can match. The third portfolio, Moderate Growth, is only available as a model portfolio and has about a 5% exposure to bonds. American Funds' portfolio solutions committee builds and oversees the portfolios, combining thoughtful portfolio construction and flexible bottom-up asset allocation. While this team typically lets the underlying fund managers drive sub-asset-class shifts, such as how much to keep in U.S. or non-U.S. equities, in April 2021, they added a 5% allocation to American Funds Smallcap World (RLLGX), which broadens the portfolios' small-cap exposure. 

Vanguard S&P Mid-Cap 400's mutual fund ((VSPMX)) and exchange-traded fund ((IVOO)) share classes earned first-time ratings of Gold. The vehicles track the S&P MidCap 400 Index, which includes companies that have market caps between $3.6 billion and $13.1 billion, positive GAAP earnings in the last quarter, and positive GAAP earnings in aggregate over the most recent four quarters. These names also need to meet certain liquidity thresholds. Constituents that violate the index's eligibility criteria are not automatically deleted, as a committee determines index changes on an as-needed basis and takes a more flexible reconstitution approach, reducing unnecessary turnover. The resulting portfolio represents the U.S. mid-cap market but does have a slightly higher small-cap allocation relative to other mid-cap index funds. Fees are attractive: The ETF share class' fee is 0.10%, while the institutional share class charges 0.08%. These fees are lower than many similar index-tracking peers and should give the fund a head start over category peers in the long run.

Patricia Oey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.