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3 Rating Changes for Vanguard Funds

We've upgraded two funds and downgraded one.

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Morningstar recently changed the fund Analyst Ratings on a trio of Vanguard funds. Russ Kinnel is here today to discuss those changes. Russ is Morningstar's director of manager research and editor of Morningstar FundInvestor.

Hi, Russ, thanks for being here.

Russ Kinnel: Glad to be here.

Dziubinski: Let's talk a little bit first about our fund Analyst Rating in general, and how often analysts review the rating, and what might trigger a rating change either up or down?

Kinnel: Sure. The Analyst Rating is a forward-looking rating, essentially telling you how do we think this fund will do against its peer group or benchmark. Obviously, Gold, the highest; Negative the worst. It's a marriage of quantitative and qualitative. So the analysts are rating the Parent, the People, and the Process, really digging in, trying to do the research, looking for competitive advantages. But then we also combine that with an estimate for the alpha potential of a category, and then we subtract fees from all that to come up with an estimate of the afterfee alpha, and then look at where that slots into an overall rating. So, it's a little complicated, but the basic idea is our best guess at what a fund is likely to do over the long haul.

Dziubinski: Now, we recently upgraded a pair of Vanguard funds. Both are pretty popular. The first is Vanguard Dividend Appreciation Index (VDADX), which moved up from Silver to Gold in April. And then we recently reaffirmed our rating after the fund announced that it was changing its benchmark. So, let's talk a little bit about the rating change there.

Kinnel: Yeah, so this is one where our underlying pillars did not change. We have it at Above Average for People and Process, High for Parent. But it's very low-fee, 8 basis points, so that meant it was really high Silver. Then when we reran the ratings, again to rate it earlier this year, it bounced up to Gold. So what that usually means is some other funds may have fallen lower either because of fees or because we downgraded them. So in this case, it just bumped higher. I think it's an outstanding fund. It's a really well-designed fund that you can own for the long haul. So a very good fund, it bounced to Gold. And then as you mentioned, we reaffirmed it. They changed their benchmark to a slightly different one, but really it doesn't change the overall picture for it, so we reaffirmed our rating.

Dziubinski: And then another upgrade was Vanguard Energy (VGENX). We upgraded that one to Silver from Bronze. And that fund went through a late 2020 makeover in strategy. Let's talk a little bit about that change in strategy and the rationale behind the increase in the rating.

Kinnel: That's right. So Vanguard broadened the strategy to a wider-ranging, not just energy but wider natural-resource, view. And we want to see how that would settle. But also we want to see how the newish manager, Tom Levering, would settle in. He came on board in early 2020. But we upgraded the People because we felt like Levering, though he was fairly short experience on this fund, had longer track records with very good performance at a couple of other funds. So, that led us to upgrade People and upgrade overall rating to Silver.

Dziubinski: And then on the flip side, we downgraded Vanguard International Growth (VWIGX) to Silver from Gold after a manager change at one of the fund's subadvisors. Let's talk a little bit about that one.

Kinnel: Yeah. James Anderson, who's the lead on Baillie Gifford, which is the the main subadvisor on the fund, is stepping down. And so that led us to take the People rating from High to Above Average. But we still like the fund. We still think there are some good experienced people who will take Anderson's place, which is why, obviously, we still have Above Average People and a Silver overall. So still a very good fund, but when you lose your leader, a very experienced manager who had a lot to do with the fund's success, we felt we should take it down a notch.

Dziubinski: Well, Russ, thank you very much for your time today and putting some of these rating changes into perspective.

Kinnel: You're welcome.

Dziubinski: I'm Susan Dziubinski for Morningstar. Thanks for tuning in.