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Fund Spy: Morningstar Medalist Edition

Ratings Changes to Highlight for November

We delve into six of the 177 strategies that were rated last month.

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In November 2018, 177 strategies were rated, 13 of which were new to coverage. We affirmed the Morningstar Analyst Ratings of 150 strategies. Additionally, five ratings were upgraded, three were downgraded, and six funds were placed under review. A select group of ratings are showcased below, followed by the full list of ratings changes for the month. 

Upgrades
 DWS RREEF Real Estate Securities' (RRRRX) sound process, cheap fees, and strong returns prompted an upgrade of its Analyst Rating to Bronze from Neutral. Comanagers David Zonavetch and Bob Thomas provide solid leadership. Zonavetch became a co-lead in 2013, and Thomas replaced former co-lead Joe Fisher at the end of 2016. The managers are backed by an additional four dedicated analysts. This fund's process, which effectively combines top-down views and bottom-up research, has improved thanks to consistent execution. From a top-down perspective, it closely monitors changes in economic data to inform its modest industry biases versus the MSCI US REIT Index. The team then comes up with net asset value estimates and uses a unique pair-trading approach to add value within sectors. The portfolio managers also benefit from DWS' direct property management group, which offers insights in many areas such as the quality of company management teams.

The rating for  Schwab U.S. TIPS ETF (SCHP) was raised to Gold from Silver because of its sizable fee advantage in a Morningstar Category that's been tough for active management. At just 5 basis points, this exchange-traded fund is among the lowest in the inflation-protected bond category. The fund's process effectively protects against inflation by accurately representing the Treasury Inflation-Protected Securities market, mitigates transaction costs, and does not have key-person risk. It replicates the Bloomberg Barclays US Treasury Inflation-Linked Bond Index, which includes fixed-rate U.S. TIPS with at least one year until maturity and $500 million in par value outstanding. While the fund offers an effective hedge against inflation, its inclusion of long-term TIPS makes it a bit less sensitive to short-term inflation, as short-term inflation has a more muted impact on long-term interest rates.

Downgrades
 Oakmark Select's (OAKLX) rating dropped to Silver from Gold following its stumbles in energy and other errors of omission. This 21-holding strategy, a more concentrated version of  Oakmark (OAKMX), depends on standout stock-picking to succeed, and execution has not been consistent enough to merit the highest Morningstar Medalist rating. The team's unsuccessful venture into energy names (an all-time high stake of 11%) arguably doesn't play to the squad's bottom-up strengths. Predicting commodity prices and gauging macroeconomic risks aren't among the team's core competencies, yet those factors heavily influence these holdings. Plus, the team's best ideas haven't consistently made it into this fund. But it remains backed by an experienced team, and the strategy has bounced back before. It posted a huge gain in 2009 after the 2007-09 financial crisis, and it's beaten the S&P 500 by 3 percentage points annualized since manager Bill Nygren's 1996 start. Investors should stay the course.

The rating for  T. Rowe Price Tax-Free Short-Intermediate (PRFSX) was downgraded to Silver from Gold following a fresh look at the fund's fees, which aren't as compelling as they once were. The majority of the fund's assets (roughly 80%) reside in its no-load share class, which charges a 0.51% annual fee. While that price tag has remained relatively constant over time, the median levy charged by its peers continues to come down. Given this team's cautious style, low fees are a key driver of the long-term success, yet this fund's price advantage is slipping. Manager Charlie Hill has been running this fund since 1995. He is supported by 11 dedicated muni analysts, most of whom have at least a decade of industry experience. Five additional veteran managers and two traders round out T. Rowe Price's muni effort--one of the larger and more experienced muni teams in the industry. While Hill largely avoids the riskiest parts of the muni market, such as the tobacco sector and Puerto Rico's debt, the portfolio has historically exhibited a preference for midquality bonds secured by specific revenue streams, with an emphasis on the transportation and healthcare sectors. 

New Ratings
 Boston Partners Small Cap Value II (BPSCX) earned an Analyst Rating of Silver upon coverage initiation, reflecting the fund's disciplined approach and deep, stable bench. An experienced team backs this strategy. Portfolio manager David Dabora is the longest-tenured member and has been at the helm since its 1998 inception. He has further support from comanager George Gumpert, who joined the team in December 2005. They can also draw upon Boston Partners' centralized group of roughly 20 analysts. The managers use the same proven approach that has been applied since the strategy's 1998 inception. Their disciplined approach focuses on identifying three key characteristics: attractive relative valuation, sound fundamentals, and positive business momentum. One drawback is the fund's above-average price tag, which creates a high hurdle to deliver outperformance. Nevertheless, this is a strong offering that should deliver attractive results over the long term.

 JPMorgan Mortgage-Backed Securities (OMBIX) was initiated with a Silver rating because of its exceptional team, low fees, and compelling long-term record. Lead portfolio manager Michael Sais has been at the helm since 2005 and was joined by comanager Rick Figuly, a stalwart and long-tenured contributor to the team's value-driven efforts, in late 2015. They benefit from the mortgage-selecting expertise of a seasoned pool of securitized analysts in the Columbus, Ohio-based office, as well as the research and quantitative tools provided by the broader firm. Agency mortgages are this fund's focus, occupying around two thirds of the portfolio, and while the fund holds traditional pass-throughs, there is also a healthy out-of-benchmark allocation to collateralized mortgage obligations. The fund's contours differ from many of its broad intermediate-term bond category peers. A lack of investment-grade corporate-credit exposure will cause it to lag core bond options when markets are frothy, but when that sector sells off, this fund's high-quality mortgage-centric holdings should give it a boost.

For a list of the open-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.

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