Morningstar updated the Analyst Ratings for 803 fund share classes, exchange-traded funds, separately managed accounts, collective investment trusts, and model portfolios in December 2021.
Of these, 623 maintained their prior rating, 29 were downgraded, 25 were upgraded, 10 were placed under review because of material changes such as manager departures, and 116 were new to coverage.
Looking through share classes and vehicles to their underlying strategies, Morningstar issued 204 Analyst Ratings during December. Of these, 77 were new to coverage, and the remainder had at least one investment vehicle that had been previously covered by a Morningstar analyst.
Below are some of the highlights of the downgrades, upgrades, and strategies new to coverage.
Upgrades
Loomis Sayles Small Cap Growth’s (LSSIX) distinct, risk-conscious growth approach boosted its Process Pillar to High from Above Average. As a result, all its share classes now carry Morningstar Analyst Ratings of Gold. The strategy’s process has some unique components and concrete risk management measures, a trait rarely seen with growth-oriented managers. The team creatively filters out the results of its idea generation. The managers claim that lower share turnover in a company's stock indicates less efficiency and therefore a better opportunity — an unusual incorporation. The managers build portfolios that fit their philosophy; they keep volatility subdued as they look to capitalize on strong but overlooked small-cap stocks. The managers have executed it well over the years, which adds to its consistency.
BlackRock Sustainable Advantage Large Cap Core’s (BIRIX) innovative approach to environmental, social, and governance (ESG) research drives exploitable quant signals in an otherwise efficient corner of the market, meriting a Process rating upgrade to Above Average from Average. As a result, its cheapest share classes now carry Silver ratings, and its costlier C shares are Bronze. The quantitative model driving this process leverages its team’s innovative ESG research to find exploitable signals in an otherwise efficient corner of the market. The model has seen success elsewhere, such as in Bronze-rated BlackRock Advantage Large Cap Growth (CMVIX), but this fund dials up the influence of ESG signals relative to its core buckets of fundamentals, sentiment, and macroeconomic indicators.
Downgrades
TCW Emerging Markets Income (TGEIX) benefits from a seasoned team that has put the strategy’s flexibility to good use. Still, as this asset class has grown, the strategy’s medium-sized team hasn’t kept pace with adding as many resources as peers, warranting its People Pillar ratings change to Above Average from High. This resulted in the strategy’s Analyst Rating downgrade to Silver from Gold across its share classes. The managers are industry veterans and long-tenured on this strategy. Their supporting cast is experienced and works together well, but it is half the size of some peers, which could leave the team stretched in an ever-expanding investment universe. Further, the team’s relative inexperience with Asian corporate credit may make it more difficult to maintain its edge as the Asian debt market grows. Still, the team’s experience and strong process bode well for the strategy’s future.
Changes across the team and process of BlackRock Balanced Capital (MACPX) led to a rating downgrade to Bronze from Silver across its cheapest share classes. The revamping includes swapping out its bond managers, an increased focus on ESG, and inclusion of international equity exposure. As a result, the People rating is downgraded to Above Average from High while the new managers settle in. Seasoned manager Phil Green will continue to skillfully lead this fund as the fixed-income portfolio will transition to the firm’s systematic fixed-income team in April 2022. As a result, Scott Radell, head of core portfolio management, and Joel Silva, head of US fixed-income portfolio solutions, will join the manager roster, while Rick Rieder, Bob Miller, and David Rogal will be removed. Radell and Silva will work with Green and his team to develop a customized bond sleeve that will make use of quant signals and focus on ESG factors.
New to Coverage
The American Funds Retirement Income Model Portfolio Series debuted with Silver ratings. It stands a cut above other retirement income strategies for its singular focus and enviable roster of underlying mutual funds. Unlike most multi-asset investors that allocate according to targeted asset-class weights, this series' eight-person oversight committee parses between income-focused strategies (steady dividend-payers and fixed income) and growth-oriented approaches (stocks with significant upside potential but elevated risk) to craft portfolios that aim to furnish healthy discretionary spending in retirement. Those objectives-based allocations are thoughtfully tailored to conservative, moderate, and enhanced risk tolerances and over time should differentiate these portfolios from less-robust retirement income offerings.
The sharp team and a disciplined allocation process behind the BlackRock Target Allocation Long Horizon ETF series of separate accounts merited an inaugural rating of Gold. Lead manager Michael Gates leverages BlackRock's industry-leading technology and taps the firm's wide breadth of resources when managing this series. Gates and 10 supporting analysts have capably managed this series since its 2016 inception. The group also runs the Gold-rated BlackRock Target Allocation ETF series and the Silver-rated BlackRock Target Allocation Tax Aware ETF series. The team implements a sensible approach focused on its long-term views to build broad market portfolios with low-cost ETFs.
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