(PUB) Investing 2016

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Looking Back at Five Upgrades Tracking Morningstar Analyst Ratings | Russel Kinnel

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 in 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 & P 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. K

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

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.