(PUB) Morningstar FundInvestor

May 2 014

Morningstar FundInvestor

9

Few Overachievers

On average, dividend-growth funds have more success on an absolute and risk-adjusted basis against tradi- tional benchmarks than the Nasdaq US Dividend Achievers Select Index.

Russell 1000 Value Alpha USD 05/01/06 –03/31/14

Russell 1000 Alpha USD 05/01/06 –03/31/14

Return USD 05/01/06 – 03/31/14

Economic Moat Wide % (Net)

Economic Moat Narrow % (Net)

Economic Moat None % (Net)

Number of Funds

Name

Average all Dividend Growth Funds

95

6.54

0.99

-0.20

37.52

40.24

9.42

Average Top Dividend Growth Funds

19

8.40

2.99

1.92

44.28

39.08

6.17

NASDAQ US Div Achievers Select TR USD

7.63

2.38

1.36

Vanguard Dividend Apprec Idx ETF

7.48

2.25

1.23

60.47

26.17

5.64

Average Lagging Dividend Growth Funds

76

6.00

0.41

-0.82

35.53

42.40

10.02

Russell 1000 TR USD

7.13

1.33

0.00

41.23

40.44

9.00

S&P 500 TR USD

6.88

1.13

-0.15

46.00

42.64

8.51

Russell 1000 Value TR USD

5.95

0.00

-1.16

31.49

46.81

12.07

comanagers Scott Davis and Mike Barclay are familiar with the fund’s process, which looks for a combina- tion of yield, price, and dividend-growth potential. Holding financials like Citigroup also restrained the returns of other large dividend-growth funds, such as T. Rowe Price Dividend Growth, T. Rowe Price Equity Income PRFDX , and American Funds Wash- ington Mutual, relative to the Dividend Achievers Index. Reasonable expenses, experienced manage- ment, and consistent processes still make these funds contenders, but so far the passive Vanguard Dividend Appreciation Index has won head-to-head. Vanguard Dividend Growth looks like the strongest for exposure to dividend-growth stocks. It has low expenses, and Kilbride has proved adept at mixing new dividend payers with old stalwarts, as well as avoiding dividend cutters. He sold AIG and Bank of America BAC in early 2008 , for instance. Three funds looked much worse compared with the Dividend Achievers Index: Fidelity Dividend Growth FDGFX , Fidelity Equity-Income FEQIX , and Fidelity Equity Dividend Income FEQTX . It’s not surprising that these funds would look erratic versus a dividend- focused benchmark. Fidelity managers historically have been more growth-leaning, and past leaders of

these funds have interpreted their dividend mandates loosely. It has only been in recent years that the firm has tried to make these more than “dividend in name only” funds. All three have seen manager changes in the past three years and are, at best, works in prog- ress. Fidelity Dividend Growth got a new manager, Ramona Persaud, on Jan. 1 , 2014 ; Scott Offen and Jim Morrow have run Fidelity Equity Dividend Income and Fidelity Equity-Income, respectively, since 2011 . Time will tell whether they stay dividend-focused and add value compared with passive dividend- focused options. So far, evidence shows it will be a tall order. Few active dividend-growth funds have been able to consistently beat the Nasdaq US Dividend Achievers Select Index on an absolute and risk-adjusted basis. There are funds and managers out there that can, but, as with other types of investments, it pays to have high standards for manager experience, discretion, execution, and expenses. œ Contact Daniel Culloton at daniel.culloton@morningstar.com