2024 has been a year of significant shifts in the mutual fund industry. The biggest names in investing have faced downgrades, often because of deteriorating fundamentals or managerial changes that have shaken up their strategies. These downgrades can drastically affect investors’ portfolios, making it crucial to understand the reasons behind them and what it means for the future of these funds. Below, we’ll dive into the biggest mutual fund downgrades of 2024, breaking down each one and offering insights into what these changes mean for investors.
1. FMI International (FMIJX) – A Step Back in International Markets
FMI International has faced a significant downgrade, dropping from a Silver to a Neutral rating. The reason? A shift in the efficacy of its strategy in international markets. The fund has long been known for its disciplined approach to investing in undervalued companies. However, recent underperformance in European healthcare stocks and struggles with non-US stocks have led analysts to reassess its effectiveness.
- Key Points:
- Rating Change: Process rating downgraded to Average.
- Performance Issues: Struggles in international markets.
- Sector Focus: Heavy emphasis on industrials and mid-cap stocks.
Despite these setbacks, FMI still maintains a solid reputation for its concentrated, value-driven portfolio, which may be appealing to long-term investors.
2. T. Rowe Price Summit Municipal (PRINX) and T. Rowe Price Tax-Free Income (PRTAX) – Manager Changes Lead to Lower Ratings
T. Rowe Price has long been a trusted name in municipal bonds, but recent departures within the team have led to a downgrade for two of its major funds. Both the Summit Municipal and Tax-Free Income funds saw their People ratings drop, leading to a reduction in their overall medalist ratings from Silver to Neutral.
- Key Points:
- Manager Departures: Continuous turnover in the fund’s team has raised concerns.
- Expense Ratio Cuts: Despite the downgrade, the funds have lowered their expense ratios, which is a positive for investors.
- Rating Change: Both funds downgraded to Neutral.
While the loss of key staff may be unsettling, T. Rowe Price’s ability to manage expense ratios and the funds’ long-term performance may still make them worthwhile for some investors.
3. American Funds Capital World Growth & Income (CWGIX) – Too Many Manager Changes
For the Capital World Growth & Income Fund, the recent manager turnover has raised significant concerns. Seven managers have left since 2018, and this constant reshuffling has led to a downgrade in its People rating from Above Average to Average. As a result, the fund has fallen from a Silver to a Bronze rating.
- Key Points:
- Manager Turnover: Seven departures since 2018, including recent retirements.
- New Leadership: New managers taking the reins in 2024.
- Performance Impact: Frequent changes have made it hard for the fund to maintain consistent performance.
While the fund still has strong leadership, the uncertainty around management is concerning for investors seeking stability.
4. JPMorgan Income Builder (JNBAX) – A Focus on Yield Without the Returns
JPMorgan’s Income Builder fund, which targets income generation, has experienced a downgrade due to its struggle with delivering competitive returns. Despite meeting income targets, its performance has lagged behind peers, resulting in a drop from a Bronze to a Neutral rating.
- Key Points:
- Yield Focused: The fund’s income-driven strategy has hindered its overall performance.
- Risk-Adjusted Returns: It has failed to outperform non-income focused peers.
- Rating Change: Process rating dropped to Average.
For income-focused investors, this fund still offers a reliable payout, but it may no longer be the standout option for those seeking growth and performance.
5. Fidelity Mid-Cap Stock (FMCSX) – Manager Turnover Concerns
Fidelity’s Mid-Cap Stock Fund has been downgraded due to frequent changes in its management team. Two leadership changes in just two years have caused concerns, leading to a downgrade of its People Pillar rating to Average, and the overall fund rating dropped to Neutral.
- Key Points:
- Manager Change: Dan Sherwood will replace Nicky Stafford at the end of 2024.
- Uncertain Future: Sherwood’s background is more focused on growth investing, which might not align with the fund’s blended strategy.
- Rating Change: Downgraded to Neutral.
Though Fidelity has a strong team, the uncertainty surrounding leadership could make this fund a less attractive choice for investors looking for stability in their mid-cap investments.
6. Western Asset Core Bond (WATFX) – Key Leadership Losses Shake Confidence
Two significant leadership changes at Western Asset Core Bond Fund resulted in a downgrade. The unexpected leave of former co-CIO Ken Leech and the exit of key portfolio managers led analysts to lower the fund’s People rating to Average, causing the overall rating to drop to Neutral.
- Key Points:
- Leadership Crisis: High-profile exits and investigations have raised concerns.
- Experienced Managers Left: Despite this, experienced managers remain in place.
- Rating Change: Downgraded to Neutral.
While the fund is still managed by experienced individuals, the leadership changes have caused significant concerns about the future stability of this bond fund.
7. T. Rowe Price Overseas (TROSX) – The End of an Era
T. Rowe Price’s Overseas Fund has seen its rating drop from Silver to Bronze due to the upcoming retirement of its long-time manager Ray Mills. Although Elias Chrysostomou, a rising star within T. Rowe, will take over the fund, his limited portfolio management experience has caused some analysts to worry.
- Key Points:
- Leadership Transition: Long-time manager Ray Mills retiring in 2024.
- Manager Inexperience: New manager Elias Chrysostomou lacks experience as a portfolio manager.
- Rating Change: Downgraded to Bronze.
While Chrysostomou has strong analytical skills, the shift in leadership could affect the fund’s future performance.
8. Goldman Sachs Small Cap Value (GSSMX) – Sluggish Performance After Manager Retirement
The Goldman Sachs Small Cap Value Fund has seen consistent performance issues since 2020, marked by a manager retirement and underperformance relative to its benchmarks. As a result, the fund’s Process rating was downgraded to Average, and its overall rating dropped to Neutral.
- Key Points:
- Manager Change: Sally Pope Davis retired in 2023.
- Performance Slump: Four consecutive years of underperformance.
- Rating Change: Downgraded to Neutral.
This fund, once a strong performer, now faces significant challenges as it adapts to leadership changes and sluggish returns.
9. Harding Loevner International Equity (HLMNX) – Struggling to Find Value
The Harding Loevner International Equity Fund has faced challenges with its investment strategy, causing a downgrade in its Process rating to Above Average from High. The fund’s focus on quality growth companies at modest valuations has been less successful in recent years.
- Key Points:
- Underperformance: The fund has struggled with Chinese stocks and other sectors.
- Rating Change: Downgraded to Bronze.
Though the fund still offers solid long-term returns, its short-term struggles could be a concern for investors seeking more reliable performance.
Conclusion
The mutual fund landscape in 2024 is marked by a number of downgrades that stem from leadership changes, strategy shifts, and underperformance. While these downgrades may not spell disaster for all of these funds, they are a clear signal to investors to reassess their holdings. Whether you’re looking for municipal bond funds, small-cap investments, or international equities, it’s essential to understand the reasons behind these downgrades and consider whether these funds still align with your investment goals.
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