U.S. Morningstar Analyst Ratings Changes to Highlight for June
Morningstar analysts rated 155 funds in June.
Overall, 155 strategies were rated, 28 of which were new to coverage, including five collective investment trusts.
In June, Morningstar manager research analysts affirmed the Morningstar Analyst Ratings of 105 funds. The ratings of five funds were upgraded, seven were downgraded including one separately managed account, and eight funds were placed under review. A select group of ratings are showcased below, followed by the full list of ratings for the month.
Dodge & Cox Global Bond (DODLX) is built on the same foundations featured in Dodge & Cox Income (DODIX): a patient and disciplined strategy, strong and experienced leadership, and attractive fees. Together with a higher confidence level in the team’s foreign-exchange capabilities, these strengths support an upgrade of the strategy’s Morningstar Analyst Rating to Silver from Bronze. The managers invest with a three- to five-year investment horizon and employ the deep, bottom-up research that is a hallmark of the firm. The strategy’s large corporate credit stake, typically near 50% of assets, makes it unique among world-bond peers, which tend to focus more on sovereign debt. Dodge & Cox employs a team of industry, credit, and macro analysts to find the companies, sectors, and currencies that are most appropriate for this strategy’s global mandate. The process leads to a concentrated portfolio with high-conviction holdings, including large allocations to emerging markets. The managers also have the flexibility to take both hedged and unhedged currency positions, but they are less aggressive on this front. This strategy tends to keep its foreign-currency exposure around 20% on average.
Increased conviction in BlackRock Emerging Markets’ (MADCX) talented lead manager drives a Morningstar Analyst Rating upgrade to Bronze from Neutral. Gordon Fraser took over this strategy in March 2017, when former manager Luiz Soarez left the firm as a result of BlackRock’s active equity lineup changes. Fraser relocated to Hong Kong from London in the summer of 2017 to be part of the 40-member Global Emerging Markets Fundamental Equities team led by Andrew Swan. Fraser runs the strategy in a similar fashion to the long-only portion of BlackRock Emerging Frontiers. He executes a style-agnostic approach by blending top-down and bottom-up research, with the goal of outperforming across market environments. The portfolio is composed of 50 to 70 stocks, with country and sector allocations typically staying within 10 percentage points of the MSCI Emerging Markets Index. Overall, the approach is reasonable, but its success is heavily reliant on Fraser’s intuition and experience. Owing to the flexible investment style, the strategy doesn’t have a predictable performance pattern, which could make it more difficult to own.
PIMCO Emerging Markets Bond (PEBIX) benefits from an enhanced process, but persistent turnover on the investment team warrants caution. Therefore, the fund’s Morningstar Analyst Rating is downgraded to Neutral from Bronze. On May 3, 2019, the firm announced that the fund’s longtime lead manager Mike Gomez was going on sabbatical from July through December 2019. At that time, experienced comanagers Yacov Arnopolin and Francesc Balcells took the reins. However, the team lost another of its veterans when Balcells departed the firm on June 13. Following this change, Pramol Dhawan, current head of the firm’s emerging-markets team, was added as a comanager here. This group has seen a significant amount of turnover (around 10 departures and 10 hires) over the past five years. The firm continues to attract experienced emerging-markets investors, but it does not seem that the dust has settled on the team’s current configuration.
Vulcan Value Partners (VVPLX) has a compelling strategy, but it hasn't been effective enough in its execution. This leads to a downgrade in the fund's Morningstar Analyst Rating to Neutral. This concentrated fund goes its own way in most respects. The March 2019 portfolio held just 25 stocks with 52% of its assets in its top 10 holdings. Manager C.T. Fitzpatrick is not at all benchmark-conscious in building this compact portfolio. As this implies, the fund competes on bottom-up stock selection. Fitzpatrick looks for companies with competitive advantages that allow them to earn high--and increasing--returns on capital. But this prudent approach hasn't led to benchmark-beating results. Since its late-2009 inception, the fund's 11.0% annualized return trails the S&P 500 by 1.3 percentage points through May 2019. During that nearly 10-year stretch, the fund beat the index just 42% of the time during rolling three-year periods.
T. Rowe Price QM U.S. Small & Mid-Cap Core Equity's (TQSIX) seasoned team and proven quantitative approach earn it a Morningstar Analyst Rating of Silver. A strong squad backs this strategy. Comanagers Sudhir Nanda and Prashant Jeyaganesh have been at the helm since June 2017. Nanda also serves as the head of T. Rowe Price's quantitative equity team and has been the lead manager on similar charge T. Rowe Price QM U.S. Small-Cap Growth Equity (PRDSX) since October 2006. The comanagers are backed by a nine-person team of research-focused quants and a seven-person dedicated IT team that helps maintain the quant model. The quantitative model gives the heaviest weighting to valuation, which accounts for 40%-45% of a stock's ranking. Earnings quality, profitability, and capital allocation get the next-largest weighting at 30%-35%; price momentum determines the rest. Further, the team’s measured portfolio-construction approach has kept turnover below average relative to its peers. Its disciplined approach should reward patient investors over the long haul.
Brandes Emerging Markets Value (BEMIX) has many strengths, including an experienced team and disciplined deep-value investment approach. The strategy merits a Morningstar Analyst Rating of Silver. Brandes takes a team approach to portfolio management, and this strategy is led by the four-member emerging-markets investment committee, consisting of Louis Lau, Christopher Garrett, Gerardo Zamorano, and Mauricio Abadia. The current committee averages 22 years of experience, 15 years of that time spent at Brandes. Management has a deep-value investment philosophy and has demonstrated a willingness to go against the crowd over the years. Analysts bring investment ideas to the committee for vetting after rigorous analysis. The portfolio of 60-85 stocks is built from the bottom up, so sector and country weightings can deviate substantially from the MSCI Emerging Markets Index as a result. One such area has been the perennial underweighting to China. While the team had long avoided Chinese equities for valuation reasons, we’d like to see it take a more proactive approach to understanding the country's dynamics.
Alfonzo Bruno does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.