(PUB) Investing 2016

I’ve written a lot in this space about how our Morning-

star Analyst Ratings have performed. But I’ve done

less about ratings changes. I decided to look at five

Morningstar

500

funds we upgraded between three

and four years ago, and then look at the subsequent

three-year return from April

2013

through March

2016

This is not to suggest that these six give us enough to

judge our track record, but I wanted to illustrate how

things have worked out since and look at our reasons

for raising the rating in the first place. I found two

funds we upgraded to Morningstar Analyst Ratings of

Gold and two we upgraded to Silver, along with one

we initiated at Gold and one we initiated at Silver.

American Funds Capital World Growth & Inc

CWGIX

We raised this fund’s rating to Gold from Silver in

November

2012

, citing its cautious approach to income

with lower-yield targets and a greater emphasis on

high-quality stocks than other income-oriented funds

in the world-stock Morningstar Category. We also

liked its management and low fees. The fund has seen

some manager changes but has stayed true to its

strategy. It has more in wide moats than the income-

oriented subset of the world-stock category, and it

has outperformed that group by about

100

basis points

per year for the past three years. It also has outper-

formed a majority of the broader world-stock group

and is modestly ahead of the

MSCI ACWI

Index over

that stretch.

MFS Global Equity

MWECX

This fund didn’t get its first rating until February

2013

but we started it at Gold right away. At that time,

senior analyst Bill Rocco placed greatest emphasis on

the management team led by David Mannheim

and comanager Roger Morley. He also liked the disci-

plined high-quality strategy for its ability to keep up

in growth rallies while providing good defense in down-

turns. All those qualities have remained, including

the good defense on display in the first three months of

2016

. All told, the fund has outperformed two thirds

of its peers the past three years and beaten the

MSCI

ACWI

Index by more than

100

basis points per year.

Fidelity Small Cap Discovery

FSCRX

This was an unusual case in which we raised the

rating to Gold from Silver just before the fund closed

to new investors in January

2013

. Our biggest worry

was that assets would grow beyond manager Chuck

Myers’ ability to manage them effectively. So, closing

this fund and adding a comanager to Myers’ other

fund sealed the deal for us. We already considered

Myers a brilliant investor and were later pleased

(for this fund’s shareholders) to see his other fund

close and plans announced for Myers to gradually

turn over that fund to his comanager before stepping

down in January

2016

. Over the past three years

this fund has outperformed a majority of its peers and

benchmark. It’s great to see what happens when

one of Fidelity’s best managers is protected from an

avalanche of cash.

FPA US Value

FPPFX

We upgraded this fund to Gold from Silver in Nov-

ember

2012

, citing strong management, great returns,

and a remarkably small asset base. Today the asset

base is still small, but management is gone, as is the

strategy. The following year

FPA

made it known that

Eric Ende would retire and Greg Herr would take his

place alongside Steve Geist. However, Geist then retired

2014

(spurring a downgrade to Silver) and

FPA

surprised us by choosing a new manager and shifting

the fund’s strategy from growth to value. (The fund’s

category moved from mid-growth to large-blend.) That

led us to lower the rating to Neutral. The fund’s three-

year performance lags the S

500

, though it’s tough

to judge given that the fund drastically overhauled

its strategy right in the middle of the period. We try

to anticipate manager changes but were surprised

by the extent of the changes and the strategy shift.

PIMCO Income

PONDX

Dan Ivascyn’s continued success with his wide-ranging

fund spurred us to raise the fund’s rating to Silver

from Bronze in November

2013

, and we’ve seen little

since to dissuade us. In fact, the fund has put up

three more great years to beat

98%

of its peers.

Looking Back at Five Upgrades

Tracking Morningstar Analyst Ratings

Russel Kinnel

What Are Morningstar

Analyst Ratings?

Our ratings are chosen for long-

term success. Analysts assess

a fund’s competitive advantages

by analyzing people, process,

parent, performance, and price.

They do rigorous analysis and

then submit their ratings to a

committee that vets their work

for thoroughness and consistency.