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Recent Rating Downgrades Signal Uncertainty

These funds were downgraded following manager changes.

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A version of this article appeared in the April 2019 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website 

A flurry of manager changes in 2019 has triggered downgrades to several Morningstar Medalist fund ratings. New managers often bring less experience to the table. There's usually a period of uncertainty about how the fund's approach, portfolio, and performance pattern will change since it can take a few months to see what moves the new manager has made. Even if a fund company says the strategy will remain the same, a new manager always puts his stamp on the fund, and there's always the question of whether he'll execute as well as his predecessor. Below are some funds that were downgraded due to manager changes.

 Fidelity Emerging Markets' (FEMKX) Sammy Simnegar will move to  Fidelity Magellan (FMAGX) in October 2019, leaving this charge in the hands of John Dance. Simnegar had successfully run the fund since 2012 with a unique approach, using his own set of rules about how to weight positions relative to the benchmark and rebalancing regularly. It's unlikely these mechanics will remain in place. Dance runs  Fidelity Emerging Asia (FSEAX) (with a Morningstar Analyst Rating of Bronze) with a lower-turnover approach, and also leads  Fidelity Pacific Basin (FPBFX), but he'll need to adapt to his new fund's broader universe. As a result, we downgraded Fidelity Emerging Markets to a Neutral rating.

Formerly Gold-rated  T. Rowe Price New Horizons (PRNHX) dropped to Bronze on the surprising news that star manager Henry Ellenbogen would leave with two analysts and his associate manager on March 31 to start his own venture. Ellenbogen posted staggeringly impressive results dating back to 2010, proving himself a skilled stock-picker in both the public and private markets. The challenge for incoming manager Josh Spencer is the fund's complexity and girth, especially with the fund down two analysts who were covering at least 20% of the portfolio's holdings, including some of its 5% stake in private companies. The closed $28 billion small-cap assignment will be an adjustment for Spencer, who previously posted strong results at formerly Silver-rated  T. Rowe Price Global Technology (PRGTX) using a concentrated, high-turnover approach that will be difficult to replicate here.

With Spencer leaving T. Rowe Price Global Technology, its rating dropped to Neutral from Silver because incoming manager Alan Tu has no past management experience. He has made successful calls as an analyst, and T. Rowe's tech team is talented and deep, but it's not clear yet how Tu will reshape the portfolio following the unique form it took under Spencer.

 USAA World Growth (USAWX) and  USAA International (USIFX), formerly Silver- and Bronze-rated, respectively, both are now rated Neutral, with Parent-level changes triggering unnecessary subadvisor shifts. The funds' former Morningstar Medalist ratings were supported by strong subadvisor selections, including MFS, Wellington, and Lazard Asset Management. Victory Capital's purchase of USAA, expected to close July 1, will likely lead to a less-desirable manager mix in the future. The new parent company has wasted no time making its mark on USAA's lineup, stating it plans to hire asset managers it owns to run the funds, including RS Investments, Trivalent Solutions, and Victory Solutions. Unfortunately for fund investors, these teams aren't as well resourced as the current mix of subadvisors, lack strong records at other charges, and don't provide any apparent diversification benefit. Adding insult to injury, it's not clear yet how the funds' assets will be split among current and future subadvisors, making it difficult to know if huge changes are in the works or if the strong existing subadvisors will still control a majority of assets. As a result of this uncertainty, both funds' Process ratings dropped from Positive to Negative. These once-decent funds are now potentially on the path to mediocrity.

 

 

 

 

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