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Fund Spy: Morningstar Medalist Edition

Ratings Upgrades and Downgrades Underscore the Importance of Team Stability

Here are some highlights from November.

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Morningstar updated the Analyst Ratings for 1,429 fund share classes, exchange-traded funds, separately managed accounts, collective investment trusts, and model portfolios in November 2021. Of these, 1,285 maintained their prior ratings, 32 were downgraded, 34 were upgraded, 43 were placed under review because of material changes such as manager departures, and 35 were new to coverage.

Looking through share classes and vehicles to their underlying strategies, Morningstar issued 291 Analyst Ratings during November. Of these, 11 were new to coverage, and the remainder had at least one investment vehicle that had been previously covered by a Morningstar analyst.

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

Upgrades

Slowing team turnover and strong resources boosted Guggenheim Total Return Bond's (GIBAX) People Pillar to Above Average from Average. As a result, its cheapest share classes now carry Morningstar Analyst Ratings of Bronze, and its costlier C shares are Neutral. Its analyst team has seen some departures over the past year, but many have been junior team members. Managers Scott Minerd, Anne Walsh, Adam Bloch, and Steven Brown receive support from more than 100 investment professionals across several teams, including a corporate credit staff of more than 45, 19 securitized analysts, and a legal staff that's responsible for analyzing documents and deal structures. The firm uses a deliberative process designed to avoid mistakes, and it has invested in risk-management technology and staff over the years.

Wasatch International Opportunities (WIIOX) has ridden out previous manager changes and proved its staying power, warranting an Analyst Rating upgrade to Bronze from Neutral. Manager Linda Lasater joined this strategy as a co-lead manager in June 2016 and took over as sole lead in January 2020 after Jared Whatcott departed. Her long tenure at Wasatch and analytical experience suit this strategy. Lasater receives additional support from comanagers Allison He, an associate manager since 2018 and firm analyst since 2013, and Daniel Chace, who used to run the strong-performing Wasatch Micro Cap (WMICX). Overall, the team boasts a strong pedigree and has ample support.

Downgrades

Heightened execution risk and team changes decreased Akre Focus' (AKRIX) rating to Bronze from Silver. Firm founder and former lead manager Chuck Akre left this strategy at the end of 2020. Comanagers John Neff and Chris Cerrone ramped up responsibility before Akre retired and have worked at the firm for several years. However, the team has seen some changes over the past few years, which raises uncertainty. The managers aim to invest in companies that can compound capital at above-average rates of return with less risk, focusing on companies with high free cash flow and sustainable competitive advantages. The roughly 20-holding portfolio is compact, so stock-specific risks are high here. The managers also must overcome a high fee hurdle.

Putnam Floating Rate Income (PFLRX) has seen notable team turnover in recent years, warranting a People Pillar downgrade to Below Average from Average. The strategy's more expensive share classes now receive a Negative rating, while the cheaper ones are Neutral. Comanagers Norman Boucher, Robert Salvin, and Paul Scanlon are industry veterans, but they're spread thin. Scanlon and Salvin are comanagers on 10 and three additional strategies, respectively, and have other roles at the firm. Persistent turnover among a smaller analyst team covering the broad investment-grade, high-yield, and bank-loan issuers is also a concern; the team has declined from 14 to 11 analysts since 2017.

New to Coverage

The BlackRock Global Allocation Select Tax Aware model portfolios debuted with Bronze ratings. A talented manager and deep support set apart the portfolios. BlackRock's global CIO of fixed-income Rick Rieder became the lead manager of the global allocation team in April 2019. Since then, the team has stabilized following a few leadership shakeups in 2017. The team is plugged into the research at other parts of the firm, such as macroeconomic and global credit research. Russ Koesterich oversees the day-to-day management here with other senior leaders, and additional support comes from 21 analysts. The lineup is primarily exchange-traded funds, which limits the ability of individual security research to impact returns, but the portfolios do have small allocations to Rieder's flagship active funds.

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