4 Big Fund Downgrades

Our fund analysts watch fund fundamentals like hawks. When they see significant improvement, they’ll raise a fund’s rating and when they see deteriorating fundamentals, they will lower a rating. Today, I’ll look at four examples of downgrades—specifically, the largest four funds that we downgraded recently.

All four are still Morningstar Medalists—meaning that we still recommend that investors consider buying them—so please don’t take the downgrades to mean they are bad funds or that you should sell them. We still think they are overall good investments. However, we have seen some issues that warrant taking the funds down a notch.

We lowered our rating on the $120 billion American Funds Capital World Growth & Income CWGIX to Bronze from Silver. American Funds are run by a bunch of managers running independent sleeves. It’s a way to make a big fund manageable and reduce key-person risk. However, turnover has been elevated here, leading us to lower our People Pillar to Average from Above Average. In recent years, seven of the fund’s 10 portfolio managers have left the fund. Two were retirements, and if it were just two retirements, we probably wouldn’t have downgraded the fund. But seven out of 10 is unusually high for American. American did replace all seven. In addition, the fund has been a mediocre performer over the past 15 years, in part because of a consistent underweighting in US stocks. The fund currently has 50% in US stocks compared with 64% for peers.

We lowered our rating on Pimco Total Return PTTRX to Silver from Gold in the face of middling performance and some adjustments in management and tactics. Mohit Mittal became lead here after Scott Mather retired in 2022. Mittal is an excellent investor, and he’s joined by other excellent portfolio managers in Dan Ivascyn and Mark Kiesel as well as global manager Qi Wang, who is experienced but new to being a manager of a mutual fund. With all the intellectual power there, our People rating remains at High. We took Process down a notch to Above Average, however, because of return challenges and Mittal’s signals that he intends to use more of the fund’s toolkit for significant moves beyond benchmark weightings. We don’t expect a dramatic change in the fund’s risk profile, but the fund has to earn back that High Process rating by showing its chops with this offering under the re-formed team. (I still own the fund.)

We cut the $23 billion T. Rowe Price Overseas Stock TROSX to Bronze from Silver because manager Ray Mills will retire at the end of 2024. Elias Chrysostomou will be elevated from comanager to lead at that time. The fund’s core strategy will remain in place. T. Rowe Price has a track record of handling these transitions well. It announces them well in advance, has the new manager work with the departing manager for an extended period, and usually keeps the strategy in place. To be sure, every manager brings a different skill-set to the table, and they have a big impact on performance. But the strong analyst staff supporting them remains in place, so we see reasons for optimism, as the Bronze rating suggests.

We lowered the $13 billion Harding Loevner International Equity HLMNX to Bronze from Silver. While three of its comanagers recently left this strategy to focus on other roles at the firm, co-lead manager Ferrill Roll, co-lead manager Andrew West, and comanager Patrick Todd remain in place, and Uday Cheruvu joined the team as a comanager. Thus, we remain confident in the team. But we are concerned that the execution of the quality growth strategy at this fund has often been flawed in recent years, leading to middling results over the trailing three-, five-, and 10-year periods here. Thus, we lowered the Process rating one notch. The fund now has Above Average ratings on People, Process, and Parent.

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