In October, Morningstar manager research analysts affirmed the Morningstar Analyst Ratings of 135 funds, upgraded the ratings of seven funds, downgraded the ratings of five funds, and assigned new ratings to 36 funds. Below are some of October's highlights, followed by the full list of ratings changes.
Christopher Franz is a manager research analyst for Morningstar.
Baron Small Cap
was raised to Silver from Bronze because of continued confidence in the fund's long-tenured manager and the firm's hallmark investment approach. Manager Cliff Greenberg has posted strong risk-adjusted returns since the fund's 1997 inception, largely by differentiating it from small-growth peers. He seeks stable small-cap stocks with consistent cash flows that he can own for years rather than those with short-term bursts of earnings growth. This leads him away from speculative biotech stocks in favor of more-stable areas, like industrials. Greenberg, who is aided by a longtime Baron analyst, exudes the firm's patient investing approach, with the fund's average annual turnover usually below 20%, compared with over 80% for peers. This means that the fund's average market cap is larger than peers and the Russell 2000 Growth Index, making the Russell 2500 Growth Index a better comparative mark. Measured against either index, the fund has performed well over the long term.
BlackRock High Yield Bond
's tenured management team uses a versatile investment approach that has consistently edged high-yield peers, meriting an upgrade in the fund's rating to Silver from Bronze. The fund's three managers have worked together for over a decade and ply a flexible approach that draws on vast analytical resources. With nearly $18 billion in assets, accessing cash bonds can be challenging, so the fund broadened its investment scope to other sectors such as bank loans, investment-grade corporates, and equities. It also invests in exchange-traded funds, credit default swaps, and total-return swaps to manage liquidity and tweak the fund's market- and industry-related exposure. This eclectic style isn't always in favor, but over time it has helped the fund outpace roughly 90% of rivals over its lead manager's tenure. Combined with competitive fees, the fund is a solid contender.
Artisan Mid Cap Value
is reshuffling its compact management team, resulting in a downgrade to Bronze from Silver. George Sertl, a comanager since 2006, will retire in early 2018 after a transition period. His departure follows the retirement of team-founder Scott Satterwhite in October 2016. The firm added Tom Reynolds, a former comanager at Silver-rated Janus Henderson Small Cap Value
, in October 2017 to assist here and at Bronze-rated Artisan Value
. Reynolds was a longtime analyst at subadvisor Perkins Investment Management before being promoted to comanager in 2013. He adhered to a similar investment philosophy at Perkins, preferring companies with solid balance sheets and strong free cash flow generation. While he'll spend most of his time at the firm's Atlanta-area offices, he'll keep his primary residence in Chicago. Comanagers James Kieffer and Dan Kane, who started on the fund in 2001 and 2008, respectively, remain.
Eaton Vance High Income Opportunities
features an experienced management team that uses a sensible investment process to generate competitive returns, resulting in an inaugural Silver rating. Lead manager Mike Weilheimer's Eaton Vance tenure dates back over 26 years. Alongside two comanagers, he employs a fundamentals-driven approach that evaluates an issuer's financial strength and ability to take on additional debt. They added a macro overlay to reduce volatility following a poor result in 2008 and are willing to hold cash when valuations and market conditions warrant. (As of Sept. 30, 2017, the fund's cash stake was 2%.) Since the fund's 2008 process tweaks, it's been a strong performer in the high-yield bond Morningstar Category and has maintained a defensive orientation. Adding to the fund's appeal are low expenses for all share classes relative to similarly distributed funds.
Principal Diversified International
received a Bronze rating because of its experienced and well-resourced team and solid results. Comanagers Paul Blankenhagen and Juliet Cohn, as well as four of the seven analysts on Principal's international core team, have worked together for over 13 years. The team seeks out companies going through a durable, positive change. It focuses on stock selection, crafting a 150-250 stock portfolio that limits sector and regional deviations relative to the fund's MSCI ACWI ex USA benchmark. The team recently made the portfolio more concentrated and lowered turnover, which should benefit the fund if stock-selection remains sound. The fund's longer-term results have been solid rather than spectacular, but they have improved in recent years, coincident with the changes to the process.