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Fund Spy: Morningstar Medalist Edition

10 Funds Get Downgraded in February

Overall, 154 strategies were rated, 18 of which were new to coverage, including four separately managed accounts and four collective investment trusts.

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In February, Morningstar manager research analysts affirmed the Morningstar Analyst Ratings of 112 funds and six separately managed accounts. The ratings of five funds were upgraded, 10 were downgraded, and three funds were placed under review. A select group of ratings is showcased below, along with tables of changes for the month.

 Baird Aggregate Bond (BAGIX) employs a cohesive team and a proven and deliberate process, and it sports low fees, all of which supported an upgrade to Gold from Silver. Lead manager and Baird CIO Mary Ellen Stanek heads a veteran team of five portfolio managers who have each worked at Baird for nearly two decades. Stanek and team curate a portfolio that’s focused on investment-grade corporate credit, securitized debt, and U.S. government bonds--the primary sectors of the Bloomberg Barclays U.S. Aggregate Bond Index benchmark. The team matches the fund’s duration to the index, while avoiding derivatives, leverage, and esoteric fare, and uses high yield sparingly. For most of the strategy’s life span, it has maintained persistent overweightings to corporate and securitized debt and downplayed U.S. Treasuries, which has given it a slight yield advantage over the benchmark. The fund’s low fees also set this fund up for success over the long term relative to higher-priced peers.

 PIMCO Emerging Markets Local Currency and Bond (PELBX) implemented process improvements in 2016 designed to help it avoid repeating past pitfalls, and these enhancements have shown through in portfolio construction and performance. Paired with the team’s vast resources, the changes help support an upgrade of the strategy’s Morningstar Analyst Rating to Bronze from Neutral. Manager Michael Gomez has run this fund since its 2006 inception and has since become leader of the firm’s emerging-markets effort. The strategy, which draws from PIMCO’s macroeconomic outlook and its vast analytical resources, remains consistent at its core. Gomez and his team look for sovereign bonds of countries they believe have the best mix of improving fundamentals and policy flexibility. In recognition of struggles with position sizing, namely overweightings in both Brazil and Mexico in 2013 and 2015, the team made a handful of changes to its process in 2016. They added refinements to position-sizing decisions via caps and the application of risk models that should allow it to better manage risk and harness the firm’s resources, including input from the then newly formed emerging-markets portfolio committee.

 T. Rowe Price New Horizons (PRJIX) will be losing star manager Henry Ellenbogen along with an associate portfolio manager and two analysts by March 31, 2019. Although his successor is accomplished, the fund's Morningstar Analyst Rating has been downgraded to Bronze from Gold. Ellenbogen has implemented a wide-ranging, eclectic approach since taking the reins in 2010. He anchored the fund in steady long-term growers, such as top-holding Vail Resorts (MTN), while also seeking out emerging public and private companies, such as  GrubHub  (GRUB), which he's continued to hold long past its IPO. Ellenbogen's skill in selecting up-and-coming private companies set the fund apart, with dozens of them boosting performance during his tenure. Incoming successor Joshua Spencer is promising but will have his hands full. He joined T. Rowe Price in 2004 and since 2012 has posted strong results at  T. Rowe Price Global Technology (PRGTX), which he'll give up managing to focus on this offering. He's long supported T. Rowe Price New Horizons as a technology analyst, though, and has successfully managed a roughly 25-stock sleeve of the portfolio since 2016, amounting to 12% of assets. Despite the fund’s personnel uncertainties, several advantages--including research depth, analytical prowess, and rock-bottom fees--remain in place to support its Bronze Analyst Rating.

The Morningstar Analyst Rating for  Columbia High Yield Bond (INEAX) was downgraded to Neutral from Bronze following recent turnover in key leadership positions. In February 2019, Jennifer Ponce De Leon officially stepped down from the fund and was replaced, as a comanager, by Dan DeYoung. She served as the lead manager on this strategy and head of Columbia’s high-yield team from mid-2010 through the end of July 2018. At that time, she took a medical leave of absence, resulting in her longtime comanager, Brian Lavin, becoming the head of the high-yield team and lead manager on this fund. The investment process has a well-developed robust approach that combines bottom-up credit research with tactical broad market analysis. The managers also operate under guardrails, such as capping positions at 3% and individual industry exposure at 25%, to keep the portfolio diversified. Despite the strength of its process, though, the departure of a key leader creates uncertainty around its execution.

New Ratings
 Virtus KAR International Small-Cap (VIISX) adheres to a sensible, high-conviction approach that has led to strong returns. Despite an altered management team, the strategy earns a Morningstar Analyst Rating of Bronze. Craig Stone, a nearly 20-year veteran of Virtus Investment Partners subsidiary and fund subadvisor Kayne Anderson Rudnick, left the fund at year-end 2018 to focus on domestic value strategies. Stone had been a comanager here supporting lead manager Craig Thrasher, who remains on the fund. Thrasher joined subadvisor Kayne Anderson Rudnick, Virtus' largest wholly owned affiliate in 2008 and helped launch this strategy in 2012. The team's robust approach under Thrasher stands out. His team seeks cash-generative companies with low debt levels and strong competitive barriers, such as brand franchises or high customer-switching costs. They look for international small-cap companies with little sell-side analyst coverage, typically below $5 billion in market capitalization, and invest with conviction while paying little heed to sector or geographic weightings. Investors should be wary extrapolating the fund's past returns, though, given its rapidly growing asset base. The fund took in nearly $700 million in 2018, pushing strategy assets near $2 billion and making it less nimble than in the past.

 T. Rowe Price Institutional Floating Rate’s (RPIFX) large, stable team, strong process, and cheap fees support a Morningstar Analyst Rating of Silver. The team backing this fund is robust and stable. Its manager, Paul Massaro, joined the firm as a wireless high-yield analyst in 2003. He launched the firm’s loan strategy with head of global high-yield Mark Vaselkiv in January 2008. The strategy focuses on income, and the team has successfully adjusted its credit-quality profile, significantly over- and underweighted sectors, and added out-of-benchmark securities as valuations have warranted. Liquidity considerations are especially important in the bank-loan category, and the team runs scenario analyses based on the portfolio's redemptions to monitor whether it has enough liquidity to buffer potential outflows. In addition, the fund’s lower than average fees offer a leg up against its bank-loan Morningstar Category competition.

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