(PUB) Morningstar FundInvestor

February 2 014

Morningstar FundInvestor

3

Let’s look at a few that did surprise me.

these funds in the classic Fidelity style: fast-trading growth funds that aim to always be ahead of the curve. Peter Lynch and Will Danoff showed how great that strategy can work, and scores of other Fidelity managers showed just how hard it is to make it work. At the moment, Baker and Shiel are on a roll, as 2013 was an ideal setting for their strategy. Yet the bloat ratio reminds me why I wouldn’t want to rate these funds higher than Bronze. Fidelity Capital Appreciation has $ 8 . 5 billion and a 140% turnover ratio, while Fidelity OTC has $ 10 billion and a 116% turnover ratio. That means they are moving a lot of stock in large volumes. Normally, I don’t worry about a large-cap fund around $ 10 billion, but I do think these funds are not that far from having some capa- city challenges. At the moment, neither is seeing big inflows but that certainly could change after their lights-out returns of late. Not only is that a concern on the bloat front, but, from a Morningstar Investor Returns standpoint, it worries me that people would be buying high and possibly setting themselves up to sell low in a correction. Conclusion As I wrote, bloat ratio is a useful measure to see if a fund is running up a big trading bill. However, it’s not something to put at the top of your selection criteria. We have posted bloat ratios for all the actively managed U.S. equity funds in the Morningstar 500 on mfi.morningstar.com . I’ll update the data occasionally so you can keep tabs on your funds. œ

Neuberger Berman Genesis NBGNX has very large stakes in rather small names. Thus, the fund’s 2 . 7% bloat ratio is the highest in the mid-growth category. Its turnover rate is just 20% , but its asset size is a massive $ 14 . 6 billion. Management has built a strong long-term track record even though the fund has a weak five-year return. We rate it Silver because of that record, but it certainly faces a big handicap in managing so much in a focused portfolio of small- and mid-cap names. Appleseed APPLX is a real surprise. The fund’s 63% turnover rate and $ 305 million asset base don’t indi- cate that there’s a bloat issue. Digging down into the portfolio, there’s another odd thing. It seems that many of the fund’s holdings represent no more than one or two days’ trading volume. Yet, the fund owns a massive 31 days’ trading volume in John B. Sanfil- ippo JBSS , and it also owns a couple of Canadian gold closed-end funds. Sanfilippo is a micro-cap name that would be quite hard for the managers to trade quickly. Yet, much of the rest of the portfolio is quite liquid, as the managers have pointed out in the past. So, in this case I’m not too worried, though I really hope they’re right about Sanfilippo. Fidelity OTC FOCPX and Fidelity Capital Appreci- ation FDCAX are similar enough to be lumped together. Managers Gavin Baker and Fergus Shiel run

Bloat’s Predictive Power

Bloat Year 2002–07

Bloat Year 2007–12

Average Bloat Ratio

Subsequent 5- Y r Return %

Subsequent 5- Y r Rank

5- Y r Percentile Rank

Subsequent 5-Yr Morningstar Rating

Average Bloat Ratio

Subsequent 5- Y r Return %

Subsequent 5- Y r Rank

5- Y r Percentile Rank

Subsequent 5-Yr Morningstar Rating

Quintile

Quintile

1

0.0113

14.96

56

42.45

2.59

1

0.0048

3.57

44

57.49

3.29

2

0.0524

15.52

53

29.13

2.86

2

0.0263

3.03

49

32.02

3.01

3

0.1331

15.59

50

37.27

2.94

3

0.0714

2.94

51

34.50

2.90

4

0.3285

15.99

46

45.95

2.99

4

0.1855

3.19

49

39.39

2.97

5

1.9282

16.34

47

50.68

3.01

5

0.9564

2.66

53

39.81

2.76

Pre-expense returns. Data as of Dec. 31, 2013.