Morningstar downgraded 194 of the investment strategies it covers, while upgrading 76 of them, the firm said Monday in a summary of Morningstar Analyst Rating activity for 641 fund share classes, exchange-traded funds, separately managed accounts and collective investment trusts.
The most significant downgrades made by Morningstar’s manager research group in December were strategies by Goldman Sachs, J.P. Morgan and Vanguard. Meanwhile, the standout upgrades were for BlackRock Total Return and the Bernzott Capital U.S. Small Cap Value.
BlackRock Managed Income (BLDIX) debuted with a Bronze rating for its cheapest share classes, while Polaris Global Value (PGVFX) started with a Bronze rating for its only share class.
Goldman Sachs High Yield’s (GSHIX) People and Process ratings were dropped to Below Average and that “dragged” its Morningstar Analyst Rating to Negative for all share classes, according to Dan Culloton, director of manager research-equity strategies at Morningstar.
That strategy’s process “doesn’t stand out, it’s seen a lot of manager changes, and it has posted desultory performance,” he wrote at the Morningstar website. The process tries to create an all-weather portfolio with a “combination of bottom-up and top-down research,” he said, adding: “While lagging like most quality-leaning portfolios do in high-yield rallies, it has failed to deliver much downside protection, and security selection has been mediocre. Current manager Robert Magnuson has been the lead only since September 2019 and a named comanager since 2014. There has been a fair amount of personnel movement in the research ranks around the team, too.”
A significant manager departure, meanwhile, led to the downgrades of several J.P. Morgan strategies overseen by the family’s U.S. behavioral finance group, Culloton wrote. He pointed to the exit of Dennis Ruhl, the group’s former CIO and a portfolio manager on JPMorgan Intrepid Growth (JPGSX), JPMorgan Intrepid Mid Cap (WOOPX), JPMorgan Market Expansion Enhanced Index (PGMIX), JPMorgan Small Cap Core (VSSBX) and JPMorgan U.S. Small Company (JUSSX). Morningstar dropped the ratings for each of the strategies’ analyst ratings to Neutral from Bronze for all share classes.
Although those funds “struggled in recent years,” Ruhl was an “integral” member of the group and “helped develop and evolve the quantitative models it used as part of its processes,” Culloton noted. “Other changes rippled through the team as a result of Ruhl’s departure,” he said, noting team members and quant analysts Wonseok Choi and Jonathan Tse became co-managers. While the managers are “familiar with the process that adds a modicum of fundamental verification to its quantitative models, it’s not clear if this change is the end or beginning of larger changes,” according to Culloton.
Last, the Vanguard Balanced Index (VBINX) has been a “solid, proven strategy whose simple, index-only, 60/40 portfolio has defied predictions of its obsolescence for years,” he said. The index’s “sole reliance on U.S. total stock market and bond market indexes, however, limits its diversification options and renders it marginally less attractive than more-wide-ranging rivals,” he said, adding: “So, though you could live a long and happy life and sleep well at night with this as a core portfolio holding, its Process rating and headline Analyst Rating for all its U.S. share classes dropped to Average from Above Average and to Silver from Gold, respectively.”
On a more positive front, a “decade of sound execution earned Bernzott Capital U.S. Small Cap Value’s compact team a People Pillar upgrade to Above Average” and an overall Morningstar Analyst Rating improvement to Bronze for its separately managed account, he said. In 2009, that strategy “broadened its universe beyond dividend-paying stocks to profitable companies with recurring revenues and manageable debt loads whose shares look cheap relative to cash flow,” Culloton wrote.
Meanwhile, the analyst ratings of BlackRock Total Return’s (MAHQX) cheaper share classes moved to Gold from Silver after its first run through Morningstar’s enhanced Analyst Rating methodology.
“Increased confidence in the thoroughness of the strategy’s all-encompassing process and the depth and breadth of its personnel and technological resources underpin the fund’s High People and Process ratings and overall upgrade,” Culloton wrote. BlackRock has also invested significantly in its fixed-income platform since lead manager and global fixed-income CIO Rick Rieder arrived in 2009, he said. It now “comprises hundreds of investors across the world and hard-to-match tools, such as the firm’s industry-standard-setting Aladdin risk management and portfolio management operating system,” Culloton said. Rieder and co-managers Bob Miller and David Rogal “tap these means to implement a subtle approach that incorporates sophisticated top-down research and meticulous bottom-up security selection,” according to Culloton.