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22
There are no coverage changes this month, so let’s
get caught up on Morningstar Analyst Ratings changes.
I’ll tackle them from most recent to oldest.
Franklin High Yield Tax-Free Income
FRHIX was
downgraded to Bronze from Silver on May 31 partly
because of concerns that management did not get
completely out of deteriorating bonds over a long span
of time. The team’s still-meaningful weights in strug-
gling Puerto Rico debt and middling returns relative to
peers precipitated the move. The fund’s Puerto Rico
exposure was as high as 6% in 2014, and depreciation
and selling took it down to 3%. But the firm merged
a Puerto Rico-heavy fund, Franklin Double Tax-Free
Income, into this fund in April 2016, which boosted
its Puerto Rico exposure to 3.8%.
Morgan Stanley
Institutional Growth
MSEGX
was
lowered to Silver from Gold. While we still like
Dennis Lynch and his team, the fund packs quite a lot
of risk. It has a focused portfolio, with a big
38%
weighting in social-media stocks such as
FB
,
LNKD
, and
TWTR
. That amount
has grown as those stocks have rallied. Lynch’s strategy
is to seek out companies that dominate their markets
and earn high returns on capital. It’s worked well over
time, but its concentration in highfliers suggest
you shouldn’t buy it for a time horizon of less than
10
years.
Weitz Value
WVALX
was downgraded to Bronze
from Silver on May
19
because of a strategy shift.
Responding to poor performance, management has
cut the discount rate it uses to value companies
to
9%
from
12%
. It did this to enable it to buy more
high-quality companies, as those names rarely
get cheap enough to qualify under the old standard.
Managers Brad Hinton and Dave Perkins have
seen the fund burned by value traps, including a
big financials bet in
2007
. The changes won’t
likely be dramatic, but the fund is venturing from
the formula that it has used for a long time.
Neuberger Berman International Equity
NIQVX
was upgraded to Silver from Bronze on April
20
because we’ve been increasingly impressed by
manager Benjamin Segal. He plies an all-cap strategy
in which he seeks strong sustainable growth
rates, healthy balance sheets, and good management.
Segal has built an impressive track record since
2003
, though it is obscured by the fact that Neuberger
Berman merged two funds run by Segal, keeping
the one with the shorter record.
Fidelity Capital Appreciation
FDCAX
was downgraded
to Neutral from Bronze because of concerns about
manager Fergus Shiel’s rather improvised strategy. He
looks at a wide array of fundamental and technical
information to get ahead of a stock move in the half-
year to year range. Essentially he’s more of a trader
than an investor, albeit a skilled one. We decided his
flexible approach was not enough of a sustainable
advantage to merit a Morningstar Medalist rating.
T. Rowe Price Small-Cap Stock
OTCFX
was lowered
on April
12
to Neutral from Silver because of
Greg McCrickard’s pending retirement. He retires in
October
2016
and will be replaced by Frank Alonso
at that time. We don’t have much of a track record for
Alonso, however. We’re confident he won’t stray
too far from McCrickard’s strategy, but his execution
remains an unknown.
K
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Strategy Tweak Prompts a Downgrade
at Weitz Value
Changes to the 500
|
Russel Kinnel
Summary of Changes
Rating Change (Downgrades)
From
To
Franklin High Yield Tax-Free Inc
• ´
Morgan Stanley Inst Growth
Œ •
Weitz Value Investor
• ´
New Ratings
To
Ariel International Investor
‰
Seafarer Overseas Gr and Income
´