Investment Strategy
We seek to pick winning funds with superior management and quantitative characteristics linked to strong performance. Our quantitative research uses the most comprehensive mutual fund database in the world to determine the best strategies for long-term investing success. We then supplement those studies with extensive qualitative research of portfolio managers, analysts, and traders through onsite visits and follow-up phone calls.
 
About the Editor
Russel Kinnel is director of manager research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors. He also writes the Fund Spy column for Morningstar.com, the company's investment Web site.

Since joining the company in 1994, Kinnel has covered the Fidelity, Janus, T. Rowe Price, and Vanguard mutual fund families. He helped develop the new Morningstar Rating for funds and the new Morningstar Style Box methodology. He also is co-author of the company's first book, The Morningstar Guide to Mutual Funds: 5-Star Strategies for Success, which was published in January 2003.

 
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About Russel Russ' Photo
Russel Kinnel,
Director of Manager Research and Editor, Morningstar FundInvestor
Russel Kinnel is director of manager research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors.
Featured Posts
5 of the Biggest Fund Downgrades of 2020

Hmmm. I just realized that I'm writing about fund downgrades in a bear market … amid a recession … in a pandemic. That's kind of piling on, isn't it? So, here are some cute puppy videos.

That's better, right?

Let's get to the downgrades. Short-term performance rarely plays a role in our Morningstar Analyst Ratings, but in a bear market that performance can be pretty telling about a fund's risk management and stock selection. Such is the case at Hotchkis & Wiley Mid-Cap Value HWMAX, where the fund's performance was shaky coming into 2020 but then really plummeted owing to an energy bet. The fund's 40% loss this year follows significant underperformance in four of the past five calendar years.

Management dialed up exposure to cyclical names starting in 2018 with overweight positions in energy, industrials, and financials. "The problem with this bold approach is that it has often led the fund into value traps," writes Morningstar senior analyst Kevin McDevitt. Hence, our downgrade of the Process Pillar rating to Average. (We still have the People rating at Above Average.) That led to a downgrade for the A shares to Neutral, while the I shares remain Bronze.

What might be better, you ask? Well, it just so happens that Gold-rated T. Rowe Price Mid-Cap Value TRMCX is reopening in June. We also have a Gold rating on Vanguard Mid-Cap Value Index VMVAX.

Manager changes are more common drivers of downgrades, and that's the case for Vanguard Energy VGENX, which was lowered to Bronze from Silver when Tom Levering took over for Greg LeBlanc. Levering is a seasoned analyst at Wellington, but this is his first time managing an energy fund. The process hasn't changed, so we maintained our Above Average rating for the Process Pillar and a High rating on parent Vanguard. The strategy is to avoid big macro bets and instead focus on companies with improving cash flow. It will be interesting to see how Levering executes the strategy, but it's good to know he'll have the support of Wellington's energy analysts and the advantage of a low expense ratio.

Amana Growth's AMAGX own management transition spurred a downgrade to Neutral from Bronze. Once again, the Process rating remained Above Average, but People was cut to Neutral. Longtime lead manager Nick Kaiser stepped down as manager, although he will remain an advisor at the firm. Comanager Scott Klimo is taking the lead spot. Again, we have a seasoned investor taking over, but this will be his first time as lead manager.

The fund is a mild-mannered growth strategy run to be consistent with Islamic law. That excludes industries like alcohol, tobacco, and pork processing, but the big restriction is financials. Avoiding financials helped quite a bit in the financial meltdown of 2008, and it has helped in 2020 as well, though performance is only about average this time around.

What might be better? American Funds AMCAP AMCPX and Primecap Odyssey Growth POGRX are both rated Gold.

Tilting toward the cheapest companies and the cheapest markets has been a bad idea for a while, and Pimco All Asset's PASAX record shows that. "By tilting toward niche areas and deep-value assets, the fund can exhibit prolonged periods of risk-adjusted underperformance, making it difficult to hold for the long term," writes senior analyst Patricia Oey. Thus, the Process rating was lowered to Average, leading the fund to be downgraded to Neutral.

What might be better? We don't have a lot of favorites in tactical allocation, but AQR Multi-Asset AQRIX rates Silver or Bronze, depending on the share class.

Vanguard Dividend Appreciation VDADX is a different case. We maintained Above Average ratings for People and Process, while the Parent rating remained High. However, under our enhanced ratings methodology, the bar is raised for Gold funds, particularly in competitive areas like large blend. Thus, the fund's Analyst Rating was cut to Silver because it didn't rate High for People or Process.

While it hasn't quite kept pace with actively managed Vanguard Dividend Growth VDIGX, it has been a solid performer with a lot of appeal. "Its focus on dividend growth gives it a quality bent, which should help it weather downturns better than its large-blend Morningstar Category peers," writes analyst Venkata Sai Uppaluri. "In combination with its cost advantage relative to its category competition, this defensive tilt should help it outperform the Russell 1000 Index over the long term. However, it applies a stringent dividend-growth screen, which may preclude it from owning high-quality emerging dividend stocks."

 

 

 

 

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