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On Tuesday, I brought you up to speed on our 10 biggest fund upgrades of 2024. Now, I’ll go from Santa to Grinch and share our 10 biggest downgrades. You’re welcome.
Bạn đang xem: The 10 Biggest Fund Downgrades of 2024
In each case, our analysts detected deteriorating fundamentals, and that spurred the downgrade. However, some of the funds I’ll highlight here have Morningstar Medalist Ratings of Bronze, which means that there are still enough competitive advantages to make them attractive, even if they have slipped a notch. I encourage you to follow the links to the full analyses to understand the ratings.
FMI International FMIJX
We downgraded this fund’s Process rating to Average from Above Average, and that took the fund’s overall Medalist Rating to Neutral from Silver. “FMI’s distinctive investment process hasn’t wavered in its approach, but its efficacy in international markets has. Its portfolio managers look for strong business fundamentals and purchase only companies trading below their estimate of intrinsic value,” writes Senior Analyst Chris Tate. “They invest in a concentrated portfolio of around 30 stocks that has considerable leeway to emphasize certain pockets of the investable universe and meaningfully underweight others. For example, the portfolio has long favored industrials and recently preferred mid-cap stocks to mega-caps. And despite the strategy’s focus on non-US stocks, it often invests materially in US-domiciled companies deriving much of their sales overseas. The research process has struggled to demonstrate its effectiveness in non-US stocks, however. Notably, decent-sized positions in some European healthcare companies have been among the firm’s worst stock picks.”
T. Rowe Price Summit Municipal PRINX and T. Rowe Price Tax-Free Income PRTAX
T. Rowe has a solid muni team, but we’ve seen a steady trickle of departures. Because a High People rating is a high bar, indeed, we lowered the People ratings to Above Average and left Process at Above Average, leading to both funds being downgraded to Neutral from Silver. But there is a silver lining: T. Rowe Price cut the fund’s expense ratios by 5 and 8 basis points to 0.45% for Summit and 0.41% for Tax-Free Income.
American Funds Capital World Growth & Income CWGIX
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We cut this fund’s People rating to Average because it has seen too many manager changes for our comfort level. That dropped the fund’s A shares to Bronze from Silver. “Since 2018, seven managers have departed the strategy,” writes Senior Analyst Stephen Welch. “Two were retirements. Capital Group publicly named seven experienced managers to fill the void, though one has since departed the firm. Diana Wagner and Reed Lowenstein, investors who had been managing money here in an undisclosed role for at least two years, became named managers in February 2024. These changes have resulted in only three of the 10 managers being here for more than 10 years. There might be a few more changes down the road because of upcoming retirements.”
JPMorgan Income Builder JNBAX
With multi-asset income funds, there is often less than meets the eye. Striving for income can lead to tepid returns, and in the long run, that means less income as well as less principal. “Multi-asset income funds’ focus on yield can often cause them to struggle to compare favorably with non-income-focused allocation peers on a risk-adjusted, total return basis,” writes Associate Analyst Nour Al Twal. “While this fund has delivered well on its income promise, it has not demonstrated an advantage compared with the average moderately conservative category peer when it comes to consistently delivering attractive risk-adjusted total returns.” Over the five years ended November 2024, the fund lagged its category index by more than a full percentage point. The fund’s Process rating was lowered to Average, which dropped the fund’s A shares to Neutral from Bronze.
Fidelity Mid-Cap Stock FMCSX
Two manager changes in two years spurred us to downgrade the fund’s People Pillar to Average, and that dragged the overall rating to Neutral from Bronze. Dan Sherwood is set to take over for Nicky Stafford at the end of 2024. Sherwood’s background is in growth investing, so it’s unclear what he’ll do at a core/blend strategy like this one.
Western Asset Core Bond WATFX
Two leadership changes at Western prompted a People downgrade to Average, and that lowered the fund’s rating to Neutral, even though the Process is still Above Average. “Former co-CIO Ken Leech took a leave of absence unexpectedly in August amid investigations by the US Securities and Exchange Commission and the Department of Justice concerning US Treasury derivative allocations across an undisclosed number of Western accounts,” writes Analyst Max Curtin. “That came less than four months after Federal Reserve policy lead and head of US broad markets comanager John Bellows’ abrupt exit in May. Overcoming both key-person losses would be a lot for any firm to handle.
“The four named managers who remain aren’t lacking in experience. Mark Lindbloom, who regained lead broad markets portfolio management responsibilities when Bellows left, and comanager Fred Marki each have spent around four decades in the industry, and Michael Buchanan and Julien Scholnick have 34 and 25 years of experience, respectively.
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“That still leaves us with succession concerns around the team’s most seasoned leaders, even if they have no intention of retiring soon. Moreover, Leech’s exit precludes him from remaining as an invaluable guide and resource for the next generation.”
T. Rowe Price Overseas TROSX
We cut this fund’s overall rating to Bronze from Silver when we pared the People rating to Average from Above Average. “Ray Mills, who has been in charge of this fund since its late-2006 inception, will retire at the end of 2024, and Elias Chrysostomou, who has contributed to the strategy as a financials analyst since he joined T. Rowe Price in 2019, will become the sole skipper at that time,” writes Senior Analyst Bill Rocco. “Chrysostomou became an associate manager in mid-2023, was promoted to comanager on April 1, 2024, and … is familiar with this strategy’s process and portfolio. Meanwhile, although Chrysostomou has spent most of his 21-year career as a financials analyst, he does have a few years of experience as a sleeve manager on financials strategies. And he will be supported by the same superior team when he is running this fund on his own as he and Mills are now. All that provides grounds for optimism, but Mills has been at the helm of this for 17 years and is talented as well as experienced, whereas Chrysostomou’s experience as a portfolio manager is still limited in length and scope.”
Goldman Sachs Small Cap Value GSSMX
This fund has been hit by a slow-burning performance slump and a manager retirement. We lowered the Process rating to Average and the overall rating to Neutral. “At year-end 2023, Sally Pope Davis, who had been a co-lead manager of this strategy with Rob Crystal since late 2006, retired,” writes Senior Analyst Gregg Wolper. “However, Crystal remained in place, and Goldman Sachs brought in Sean Greely, an experienced senior investor with a specialty in small-cap financials, to replace Pope Davis both as co-lead manager and as financials sector leader.
“This fund was a solid performer for many years prior to 2020. But that marked the first of four consecutive years that the mutual fund’s institutional shares trailed its Russell 2000 Value Index prospectus benchmark in a variety of market conditions. It again fell short in 2024 through October. The portfolio’s metrics typically land between those of its value-tilted benchmark and the core Russell 2000 Index, and in some periods, it has trailed one but topped the other. But through October, the institutional shares’ annualized 10-year returns trailed both the Russell 2000 Value and the core Russell 2000 indexes.”
Harding Loevner International Equity HLMNX
We lowered our Process rating for this fund to Above Average from High, and that took the overall rating down to Bronze from Silver. The strategy here is to find quality growth companies that are trading at modest valuations. That’s not easy, as the market generally puts a premium valuation on quality companies, and lately the team hasn’t executed that strategy very well.
Although the fund’s 10-year returns are decent, the fund lands in the bottom decile with a negative 1.4% return annualized for the trailing three years and in the bottom quartile with 4.2% annualized for the past five years. Chinese stocks have hurt the fund recently, but there have been a few sore spots in recent years.
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