1-Star Funds That Are Worth Your While

The best time to buy a good fund is usually when it looks its worst. Think of a growth fund in 2022 or a value fund in 2009, and you get the idea. The tricky bit is maybe you are wrong about it being a good fund. We have a handful of funds in the Morningstar 500 with Morningstar Medalist Ratings of Gold, Silver, or Bronze that also have Morningstar Ratings of 1 star.

That means the funds have poor risk-adjusted returns over the past three-, five-, and 10-year periods, but our analysts think they have strong fundamentals to turn things around. I wouldn’t want to go build a portfolio of 1-star funds, but a few are worth a look.

I chose four particularly promising ones. Vanguard Long-Term Bond Index VBLAX is on this list for a simple reason: Interest rates spiked in 2022. Its three- and five-year returns are in the red, and the 10-year return is a meager 1.7% annualized. The fund has little credit risk but a ton of interest-rate risk, as should be clear from the name. On the plus side, the next five years probably won’t have as big an interest-rate spike, though you never know. We rate the fund Silver because its 0.07% expense ratio makes it a very cheap way to get exposure to long-term bonds. Go easy with your investment, though, because that interest-rate risk is very real.

JPMorgan SMID Cap Equity PECAX has likewise been on the wrong side of some big market trends. For most of the past decade, large caps beat mid-caps, and mid-caps beat small caps. So, small-/mid-cap funds in mid-cap Morningstar Categories have suffered from way too much small-cap exposure. That’s not the managers’ fault as that’s what the fund says it does, but an emphasis on quality and valuation has also gone against the grain. However, we like the seasoned team of Don San Jose and Dan Percella and think they will lead the fund to better days.

We rate Oakmark Global OAKGX Silver despite poor recent results and some manager changes because we have faith in Harris Associates’ value process and the depth of the team. An aversion to energy means the fund hasn’t participated in value rallies lately, but we haven’t seen any breakdown in the process that has proved itself over many decades.

Oakmark Global still has seasoned leadership. Tony Coniaris, who joined the firm in 1999, was named a comanager here in 2016 and has assumed more responsibilities since; he stepped down from Oakmark Select OAKLX in December 2023 to focus on global mandates. Colin Hudson and John Sitarz were added as comanagers here and on more concentrated sibling Oakmark Global Select OAKWX in 2022 to further bolster the US team.

Janus Henderson Developed World Bond HFATX got caught leaning the wrong way when interest rates spiked in 2022. The fund’s duration was longer than most peers, and it paid the price in performance. Hence, the 1-star rating.

However, we see some good qualities despite the mistake. We rate People and Process Above Average and the T shares merit a Bronze rating.

John Pattullo, the firm’s co-head of global bonds, will retire in March 2025. Pattullo and veteran manager Jenna Barnard have jointly overseen the firm’s global bond group and comanaged a number of global strategies since 2004. They took over this particular fund in 2008.

The team remains well-resourced; the six remaining portfolio managers will continue to rely on the backing of two client portfolio managers and leverage the output of Janus Henderson’s 22-strong credit analyst team (while also continuing to carry out their own credit and market research).

The managers employ a flexible approach here, mostly looking to add value through sector allocation. The managers use a range of derivatives strategies across rates and credit markets. The overall approach, including risk management, is pragmatic and relies heavily on the managers' ability to analyze the economic cycle and position the strategy accordingly.

This article originally appeared in the January 2025 issue of Morningstar FundInvestor. I did swap out one fund for another because one now has a 2-star rating. For a sample copy of FundInvestor, click here.