Ken Oshodi is an analyst, manager research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.
TIAA-CREF Bond Plus
was upgraded to Bronze from Neutral because of a strong management team, notable track record, and attractive fees. Veteran and lead manager Bill Martin took over the fund in August 2011 and is supported by a large and experienced team that includes comanager Kevin Lorenz, 11 sector portfolio managers, 36 senior analysts, and 15 junior analysts. The group has used a value-driven strategy to guide the fund to an impressive record during Martin’s tenure. This fund invests across a mix of corporate bonds, mortgages, securitized debt, and foreign bonds. The strategy also targets a 20%-30% allocation to “plus” sectors: high-yield bonds, bank loans, and emerging-markets debt. Those sectors come with additional credit risk, but investors have been well compensated for those risks. From Martin’s mid-2011 start date through February 2017, the fund’s 4% return lands just outside of the best-performing decile among its intermediate-term bond Morningstar C
Ivy Asset Strategy
was downgraded to Negative from Neutral for several reasons, including a bout of turnover at the firm, substantial outflows, and a relatively illiquid private placement holding that has stifled recent performance. The fund’s lagging results in the past few years suggest that the management team isn’t equipped to surmount these issues. The fund uses a go-anywhere approach, which warrants a deep and experienced team, but fund resources have thinned. Longtime manager Michael Avery retired in June 2016, roughly two years after former comanager Ryan Caldwell left the firm. This comes in addition to several analyst departures and layoffs since early 2016. Portfolio managers Cynthia Prince-Fox and Chace Brundige both earned solid results at their previous posts, but that hasn’t translated to success here. The fund has lost an annualized 5.4% during their August 2014 through February 2017 tenure, placing it in the worst-performing 2% of the world-allocation Morningstar
Fidelity Small Cap Discovery
was downgraded to Bronze from Gold because of a planned manager transition at the end of the year. Manager Chuck Myers will step down at the close of 2017. While Fidelity has a reasonable transition plan and successor in place, his departure is a big loss. From Myers' 2006 start through February 2017, the fund's 10.4% annualized gain led nearly all small-blend Morningstar Category peers and beat the Russell 2000 Index by 3.5 percentage points. Considering Myers’ mostly sector-neutral approach, the fund’s success is very much a product of his stock-picking. While Myers’ planned successor, Derek Janssen, has proved thoughtful in his decision-making at Fidelity Small Cap Value
, he has several hurdles to overcome in this transition, including adjusting to a new benchmark (the Russell 2000 Index) and managing a fund that is twice the size of his current offering. Janssen will take on more responsibility with Fidelity Small Cap Discovery as the year progresses, while simultaneously handing off Fidelity Small Cap Value to a first-time manager.
IShares Core S&P US Value
exchange-traded fund is one of the lowest-cost funds in the large-value Morningstar Category, giving it a sizable cost advantage against most of its peers. It earns a Morningstar Analyst Rating of Silver. The fund's broad market-cap-weighted portfolio effectively diversifies risk, accurately represents its target market, and promotes low turnover. In January 2017, BlackRock switched the fund's benchmark to the S&P 900 Value Index from the Russell 3000 Value Index, which effectively removed its small-cap holdings. And, unlike most indexes, the S&P 900 is maintained by a committee rather than a set of mechanical rules. This committee requires new constituents to have positive net income over the previous four quarters, which introduces a slight quality tilt. The fund’s cost advantage has helped it to beat the large-value Morningstar C
ategory average by 61 basis points annually over the trailing 10 years through January 2017.
Principal High Yield
offers an experienced management team that has guided the fund to strong returns through a variety of market conditions. Managers Mark Denkinger and Darrin Smith took over this fund in May 2009 and were joined by Josh Rank in June 2015. Together, the three managers average more than 22 years of industry experience.
The strategy combines top-down economic guidance and bottom-up security selection. Senior managers create a macroeconomic outlook that is updated regularly and provides a framework for the investment team. From there, analysts conduct bottom-up credit analysis that drives industry weightings and individual position sizes.
This disciplined process particularly helped the fund during the recent high-yield sell-off. The fund’s 2.8% loss in 2015 (a difficult year for commodity-related securities and high-yield bond funds) was better than 60% of its peers. The fund went on to outperform 70% of its peers with a 15% gain when the high-yield market bounced back in 2016. In addition to the aforementioned positives, each of the fund’s share classes carries a Morningstar Fee Level of Low or Below Average relative to peers in the same distribution channel. This fund earns a Morningstar Analyst Rating of Bronze.