It has been
13
years since we introduced Fund Analyst
Picks,
10
since we introduced more rigor, including
a vetting committee, and just over one year since we
transitioned to the Morningstar Analyst Rating.
That gives us a broad swath of time to look at how
we rate funds.
In order to illustrate the process, I chose a handful
of funds that have been picks or Gold-rated over the
years and examined the ratings, performance, and
Morningstar Ratings for funds, or “star ratings,” over
that same time. As you’ll see, the picks and Analyst
Ratings change far less often than the star ratings.
The star rating is a quantitative measure of a fund’s
load-adjusted and risk-adjusted performance relative
to category peers over the trailing three-, five-, and
10
-year periods. In contrast, the Morningstar Analyst
Rating is a qualitative fundamental-driven look at a
fund’s long-term prospects. The star rating is updated
monthly, while the Analyst Rating is subject to
revision at any time by our analysts and ratings com-
mittee. For example, a couple of weeks ago we
lowered
T. Rowe Price Health Sciences
PRHSX
to Neutral from Gold because the manager left
and took two analysts with him. (See Tracking Morn-
ingstar Analyst Ratings for more on this fund.)
While we keep a close eye on funds, we are also
patient.Thus the Analyst Rating and the picks before it
tend not to change nearly as often as the star rating.
The Analyst Rating reflects things not taken into
account by the star rating, such as manager changes,
changes in expense ratios, the quality of the fund
company, and returns outside of those three-, five-,
and
10
-year periods. We generally focus on the
manager’s track record over the entire time he or she
was at the fund as well as at other funds or sepa-
rately managed accounts.
Thus, while most of our Gold-rated funds are
4
or
5
stars, there are some with lower star ratings.
Harbor Bond
HABDX
Sometimes it is that simple. We made Harbor Bond
an Analyst Pick in
1999
and have given it our top
rating ever since. It’s the most accessible, cheapest
retail version of
PIMCO Total Return
PTTRX
,
and we’ve long been fans. By
1999
Bill Gross had
already won our Manager of the Year award,
and most other taxable-bond funds neither could
match
PIMCO
for resources nor Bill Gross for skill.
Even though the rating seems like a no-brainer with
hindsight, it was controversial just a year ago.
A bad call led to dismal relative performance in
2011
,
and many reporters and investors alike said
PIMCO
Total Return was too big. The star rating dropped to
4
stars and is still there at this writing. We believed
that the bad call was the problem, not asset size, and
we’ve seen the fund recover from other bad calls,
so we stuck with it. Even someone as good as Bill
Gross is going to make errors from time to time.
When we evaluate managers, we look to see if their
mistakes are within the realm of reasonable expecta-
tions and whether they indicate something important
has broken down. This fund passed the test, and
FundInvestor
Continued on Page 2
Research and recommendatio s for the s rious fund investor
Our Mostly Patient
Approach to Rating Funds
Fund Reports
5
Artisan Small Cap
FPA Paramount
FPA Perennial
Morningstar Research
8
Inside the Neutral Rating
The Contrarian
10
Great Rotation? Fuhgeddaboudit
Red Flags
11
Inconsistent Funds
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
How to Invest RMDs
You Don’t Need
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
FundInvestor 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel,
Director of FundResearch and Editor
SM
March
2013
Volume
21
Number
7
