Morningstar downgrades small-cap funds on PM exit and process doubts

Morningstar downgrades small-cap funds on PM exit and process doubts

Analysts at Morningstar have downgraded two small-cap funds, while upgrading two others in their latest round of ratings. 

Overall, analysts at the Chicago-headquartered research shop upgraded 51 strategies, downgraded 31, placed 26 under review and added 13 to their coverage. 

One of the 31 strategies downgraded was the $716m Boston Partners Small Cap Value fund. The move was triggered by the departure of the fund’s long-time manager Dave Dabora, who retired abruptly in September after running the fund since 1998, according to Morningstar analyst Greg Carlson.

The fund’s institutional share classes dropped from a gold rating to silver, while its more expensive investor share class moved from silver to bronze. 

Longtime co-manager George Gumpert now runs the fund alongside two analysts, but Morningstar considered it a small enough team that its personnel had taken a substantial hit from Dabora’s departure. 

‘The team does receive support from that central team, but the fund’s team does much of the research for this portfolio and two others on its own,’ Carlson wrote. 

Another small-cap fund to be downgraded was the $915 Victory RS Small Cap Growth fund, with its more expensive share classes dropping from bronze to neutral, due to ‘questions about the repeatability and consistency’ of the strategy.

The fund has returned -3.89% annualized for the last three years, behind the Small Growth category average of 6.39% over that span. 

Carlson also singled out a couple of September upgrades, besides the $8bn Columbia Threadneedle Seligman Technology and Information fund, led by longtime manager Paul Wick, which Citywire previously reported had been upgraded. 

Two strategies subadvised by Kayne Anderson Rudnick Investment Management had their grades raised: the $1.5bn Virtus KAR Small-Cap Core and $3.5bn Virtus KAR Small-Cap Growth funds. 

The former, which saw its cheapest share classes bumped from silver to gold has generated a 9.26% average annualized return over three years, beating the Mid-Cap Growth average of 5.86% over that span. The latter, which rose from bronze to silver across all share classes, has done well over longer horizons but less so recently: its 4.26% average three-year return trails the Small Growth category average of 6.39%. 

Both funds are run by Jon Christensen and Todd Beiley, a tandem that’s been in charge of the strategies for about a dozen years. KAR is a wholly-owned subsidiary of Virtus.

The $8.4bn MainStay MacKay High Yield Municipal Bond fund, a New York Life Investment Management strategy that’s advised by MacKay Shielders, saw its cheapest share classes upgraded from bronze to silver thanks to a ‘thoughtful approach’ by Bob DiMella and John Loffredo, Carlson wrote. 

The strategy has lost 2.02% on average each year over three years, beating the Morningstar High Yield Muni category average of -2.43% in that time. 

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