Morningstar - Q4 2021 - 22

Dispatches
induced bear market validated the value-focused
process of managers David Herro, Michael Manelli,
and Justin Hance. Foreign small- and mid-cap
value stocks are relatively risky and generally very
vulnerable to global slowdowns, but there can
also be some rewarding bargains.
Vanguard Dividend Appreciation Index VDADX
Occasionally, overall ratings change even
though all pillars remain untouched. This fund was
upgraded to Gold from Silver because of the
interplay of pillar ratings, fees, and the ratings of
other funds. Our Analyst Ratings begin with
an estimate of alpha potential across all
Morningstar Categories, then we apply a fund's
pillar scores to derive an alpha expectation
before fees. For passive funds, we weight Process
as 80%; People and Parent each account for
10%. Fees are then subtracted and overall ratings
are slotted in based on the mix of fees and
pillar ratings of other funds. This is an excellent
passive fund that charges just 0.08% for Admiral
shares and 0.06% for the exchange-traded
fund (VIG). We rate People and Process as Above
Average and the Parent as High. Given its
supercheap fees and strong pillar scores, it
probably didn't take much to nudge this fund into
Gold territory.
T. Rowe Price Floating Rate PRFRX
T. Rowe Price was late to the bank loan category,
but the firm really nailed it. It launched the
fund under manager Paul Massaro in 2011 and
built up a strong staff around him. That's huge
because bank loans require quite a bit of research.
Massaro has taken a fair amount of risk, but
the fund generally has had marketlike losses in
downturns and outperformance in rallies. We first
covered it in 2020, and on the second time
around we upgraded its People Pillar to High from
Above Average in March. Along with High
ratings for Process and Parent, that raised the
fund to Gold from Silver.
T. Rowe Price Global Growth Stock RPGEX
We upgraded this fund's Process to High, giving
it High ratings across the board and an overall
upgrade to Gold from Silver. Manager Scott Berg
has really impressed over his 13 years at this
world large-stock growth fund. He's an aggressive
investor in some ways. He has a fourth of the
22
Morningstar Q4 2021
fund's assets in emerging markets and runs fairly
high portfolio turnover in the 80% neighborhood.
So, we took our time before giving the fund
a High Process rating. He mutes some of that
aggression by running a fairly diffuse portfolio of
names he thinks will dial up growth via
productivity gains.
Downgrades
Keep in mind that all of the Morningstar Medalist
levels are still recommended, so a downgrade
to Silver or Bronze is definitely not a sell signal.
Rather, it's an indication that we think a fund
is still attractive but has lost some of its appeal,
whether that's due to rising fees, a manager
change, a reassessment, or the fundamentals.
American Funds Capital World Growth
and Income CWGIX
We downgraded this fund after a number of
manager changes-some were smooth transitions
around retirements, but others were surprises.
We cut this fund's People rating to Above Average
from High, moving the A shares to Bronze from
Silver. Three managers stepped off as part of a
reorganization, but then the firm terminated lead
manager Mark Denning, and Joyce Gordon
moved on to other funds. Further, a month after
our downgrade, American announced the
departure of Alex Sheynkman. That's a lot of
change. On the plus side, the new and remaining
managers are experienced, the strategy is still
sound, and fees are still modest.
Fidelity Large Cap Stock FLCSX
This time it's a Process Pillar downgrade. Our
issue is with managing the downside. In
the context of large-blend strategies, Matt Fruhan
seeks out undervalued companies. The trick
with that strategy is avoiding value traps,
or companies that are cheap and getting cheaper
because their fundamentals are deteriorating.
Every value strategy suffers from some of
those missteps, but Fruhan has had more and
held on longer. This led us to downgrade
the Process rating to Average from Above Average
and the overall rating to Bronze from Silver.
T. Rowe Price Mid-Cap Value TRMCX
This one kind of caught us by surprise. David
Wallack announced that he will retire in June 2022,
but his replacement, Vincent DeAugustino, doesn't
have as much experience in general or on the
fund, which is not what we typically see in these
situations at T. Rowe Price. We cut People
and Process to Average from High and the overall
rating to Neutral from Gold.
Templeton Global Bond TPINX
This fund has stuck to its guns, and that means
it has been wrong for a long time. Manager
Michael Hasenstab has been bullish on emerging
markets and bearish on U.S. bonds. The fund
kept duration near zero while maintaining outsize
bets on Ukraine and other emerging markets.
We stayed positive on the fund given Hasenstab's
record, but eventually we had to conclude that
he's not as good as we thought. We downgraded
the fund to Neutral from Silver.
Vanguard International Growth VWIGX
We feel pretty good about the transition going
on at subadvisor Baillie Gifford, but with James
Anderson retiring in April 2022, we thought
Above Average was a more appropriate People
rating. That took the fund's Analyst Rating
from Gold down to Silver-still a high rating.
Russel Kinnel is director of manager research at
Morningstar Research Services LLC. He is also the editor
of Morningstar FundInvestor.
Why Funds Die
Fund mortality is an often overlooked but
important component of fund selection.
Dead funds don't compound investors' capital,
let alone beat the market.
Shutting down a fund may hurt investors in
other ways. Liquidated funds may saddle
an investor with the costs of closing a fund, an
unexpected tax bill, and opportunity costs
tied to reallocating assets. And merged funds
could push investors into strategies they
didn't originally sign up for.
We recently examined all U.S.-domiciled mutual
funds and exchange-traded funds in Morningstar's
https://www.morningstar.com/funds/xnas/vdadx/quote https://www.morningstar.com/funds/xnas/tpinx/quote https://www.morningstar.com/funds/xnas/cwgix/quote https://www.morningstar.com/funds/xnas/vwigx/quote https://www.morningstar.com/authors/35/russel-kinnel https://www.morningstar.com/funds/xnas/prfrx/quote https://www.morningstar.com/funds/xnas/flcsx/quote https://www.morningstar.com/funds/xnas/rpgex/quote https://www.morningstar.com/funds/xnas/trmcx/quote
Morningstar - Q4 2021

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