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Funds With the Best People

Russel Kinnel (russel.kinnel@morningstar.com)

A version of this article first appeared in the February 2020 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website. 

Since we rolled out our Morningstar Analyst Ratings in 2011, I've been asked many variations of this question: "You gave both of these funds four positive pillars, so why is this one a Bronze and that one a Gold?"

Those questions should be a thing of the past because we are now showing our pillars on a five-tier scale from Low to High. Funds we believe to have elite people or processes are more likely to get Gold or Silver ratings. Parent and price still factor in, as does our estimate of the Morningstar Category's return potential.

As we work our way through the more than 1,400 funds on our coverage list, you'll see more High ratings emerge. But there won't be a lot. We're pretty picky about handing out High ratings. Let's take a look at the 15 of the 19 Morningstar 500 funds that have earned a High People Pillar rating so far.

Our People Pillar rating is all about a fund's competitive advantage. Just about every fund we rate has experienced managers from good schools, but that's not enough. We want managers with good experience working with other smart investors. We look for managers with strong track records and high levels of investment. We also want managers with insights and experience that enable them to do something that few can match.

In addition, we go beyond the managers to look at comanagers and likely successors. Analyst support is crucial, as are the traders supporting funds. We meet with analysts and traders on our on-site visits to understand how they do their jobs and what kind of people the firm hires. We look at analyst experience levels, analyst turnover, and the performance of other funds to understand how strong a team is.

Turnover among analysts and managers is a warning sign for a couple of reasons. First, it tells us that some of the analysts and managers would rather build a career at another firm. Second, it's hard to get a team to really do outstanding work when it is constantly in flux.

T. Rowe Price Capital Appreciation PRWCX
Over the past 20 years, T. Rowe Price has really raised the quality of its analyst staff. It has done remarkably well in the growth rally of the past decade thanks to strong tech and healthcare analysts. You can see it in the results across many of T. Rowe's equity funds. Put that team together with a great manager like David Giroux and you get a High rating for People.

Giroux has produced remarkably consistent outperformance since taking the helm in 2006. He's done it mostly with stock selection but also with asset-allocation calls. In the past decade, he has beaten his average peer in each calendar year and the category benchmark in nine of 10 years. He invests more than $1 million of his own money in the fund.

BlackRock Total Return MDHQX
We raised our People rating from Above Average to High in December 2019. Manager Rick Rieder came to BlackRock in 2009 and built a team that has gradually raised the firm's game. One of the bond giants, BlackRock has long had great technology and resources, but prior to Rieder's arrival, BlackRock's bond funds were generally B students. Now, process and team have really come together so that they can effectively run very large sums of money. In all, BlackRock has over 250 fixed-income investment professionals around the globe. And Rieder's team is able to add value through issue selection and macro calls.

Talk about a competitive advantage. It would be extremely difficult to replicate what BlackRock has.

Causeway International Value CIVVX and Causeway Global Value CGVVX
We almost always rate managers the same across all the funds they run if it is truly the same management setup. Thus, you have High People ratings for this team run by Harry Hartford and Sarah Ketterer. It seems consistent on that level, but Causeway Global Value has a Morningstar Rating of 1 star and Causeway International Value is rated 3 stars. It's not that they are obtuse when they pick global stocks; rather, the issue is that the world large-stock category is not style-specific, so value funds look weak in comparison. In addition, Causeway has a longer record in the foreign-equity strategy. We generally judge managers by their longest relevant strategy.

We've covered Ketterer and Hartford almost since I started at Morningstar--when they were at Hotchkis & Wiley--and then when they set up their own firm in 2001. Five comanagers, including Jonathan Eng, who has worked with the team since 1997, add depth to the roster and mitigate key-person risk. In addition, the managers have an analyst team 28 that only serves these value-driven strategies.

T. Rowe Price's Muni Bond Team
Five of the 19 funds with High People ratings are T. Rowe Price municipal-bond funds. The funds have different managers, but it's very much a team effort at these funds. Each has one manager, the support of five other managers, 11 analysts, and two traders. The managers are seasoned, as are the analysts. The funds tend to take some risk relative to peers and benchmark but always in moderation and with good reason. In all, the team runs $29 billion and has produced solid results. The five funds range in overall ratings from Bronze to Gold. The Bronze ratings are in shorter-duration categories where the return potential is muted. The lone Gold is in high-yield munis where return potential is highest among muni funds.

Fidelity Growth Company FDGRX
Fidelity has a large team of analysts, but we don't give a High People rating to many of its equity funds. It takes a standout like Steve Wymer to make the most of all those resources. Wymer joined Fidelity in 1989 and took the helm at this fund in 1997. He's done a remarkable job of keeping attuned to the dominant growth stories and elite management over those years. He has invested in private equity both for the returns and the information it brings about emerging growth areas. He reminds me a bit of Will Danoff in that he runs a very diffuse portfolio yet still produces strong returns.

Western Asset Core Bond WATFX and Western Asset Core Plus Bond WACPX
Western Asset has long been a respected institutional bond manager, but the firm had some work to do to repair its process and reputation after it lost more than peers did in the 2008 meltdown. The firm built up its risk management in the wake of those losses, and now it is more savvy about when and where to take its risks. It has produced top-decile returns over the trailing three-, five-, and 10-year periods at both of these funds.

Now its deep team can really add value. The funds boast five managers from a total of 44 firmwide as well as 44 analysts and 21 traders. The team is spread around the globe and is as good as we see in the industry.

John Hancock Disciplined Value JVLAX
Veteran value investors Mark Donovan and David Pyle have produced excellent results over their long tenures. Donovan has run this fund since 1997 and Pyle since 2005. We like that subadvisor Boston Partners has handled past retirements well. In 2018, they named David Cohen and Stephanie McGirr as comanagers, signaling who will likely take over down the road.

The managers are supported by a high-quality team of 23 fundamental analysts and eight quantitative analysts. We're impressed by the stability in the group as well as the consistency of this fund's value discipline.

Metropolitan West Total Return Bond MWTRX
This is a bold fund whose managers have the freedom to make big bets relative to the benchmark, so it's a good thing they are a seasoned quartet. Three of the four have been with the fund since its 1997 inception. They worked together at Hotchkis & Wiley before that, so there is plenty of experience here.

The generalist managers work with a group of specialists dedicated to key sectors in the bond world. They in turn make the most of the team's 40 analysts who seek out great values in the market. Like Western Asset and BlackRock, this is primarily an institutional bond manager but one that has good funds for individual investors, too.

American Funds New World NEWFX
One word that comes to mind when I look at an American fund is "depth." Not many fund companies have as many seasoned managers and analysts as American Funds. It aligns incentives so that the big money to be made at the firm is over the course of a career, owing to ownership in the firm. They also make the analyst career track equal to the portfolio manager career track, so you have tremendous experience in the analyst ranks that few competitors can match. This fund has 11 managers, two of whom have been with the fund since it was launched in 1999.