(PUB) Investing 2015

January 2 015

Morningstar FundInvestor

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Thus, you get some real individual stock risk tempered by the emphasis on steady businesses. Compared with most mid-growth funds, this one has a drastic underweighting in health care and tech. And because FPA funds without “Crescent” in the name continue to labor in obscurity, there’s little chance this fund will suffer from asset bloat anytime soon. Akre Focus AKREX is another atypical growth fund worth investigating. Chuck Akre runs a focused steady-growth portfolio that rarely ventures into health care and technology. Akre buys “compounding machines” with high cash flow, strong management, and the ability to reinvest cash at a high rate of return. Instead of the Apples AAPL and Teslas TSLA common to growth funds, you see MasterCard MC , American Tower AMT , and Danaher DHR . Akre has built a great record here and previously at FBR Focus (now Hennessy Focus HFCSX ). Small Growth Conestoga Small Cap CCASX really fits the unloved mold. The fund, which has a Morningstar Analyst Rating of Silver, had a great record until its pratfall in 2014 when several of its top tech stocks got whacked. The long-term returns here remain solid, though, and it seems appropriate to have one truly unloved fund with rebound potential. T. Rowe Price Diversified Small Cap Growth PRDSX shows that quantitative funds can still deliver. Since 2008 , many quant funds have had their circuits blow, but this fund has been a real steady performer. Manager Sudhir Nanda runs a low-turnover diffuse portfolio that has produced strong results. Quant models crunch numbers on valuations, earnings quality, and financial health to produce a portfolio of more than 200 names. Meridian Growth has tremendous promise, although it isn’t the easiest to buy into. The Legacy share class, MERDX , is widely held but closed, so new investors have to go through the Investor shares, MRIGX , which have a $99 , 999 minimum investment. Sorry if that is a deal-breaker, but I think it’s compelling if you can get in. Chad Meade and Brian Schaub are focused growth investors who built

a brilliant record at Janus Triton JATTX . The duo looks for fast-growing companies with strong competitive advantages. The fund holds a mix of aggressive tech names like Cadence Design Systems CDNS alongside cheaper steadier stocks like property manager Jones Lang LaSalle JLL . Avoid the Loved So, what are the most-loved categories? Foreign large blend drew the highest flows in 2014 , followed by large blend and emerging markets. The strategy suggests dialing down exposure to these categories. However, I’m not sure I’d go too far with that. Those first two are core categories that you should always own. If you read the cover story, you know I think emerging markets are relatively attractive. Historically, flows have followed performance, and that’s why the strategy has been a winner. It leads you to relatively cheap asset classes and away from pricey ones. But since 2008 , performance and flows have decoupled on the asset-class level even though they continue to be linked on a fund level. Now flows are more linked to headlines. Some people have taken a pessimistic (albeit incorrect) view of America’s economy and looked to China as a superior bet. It hasn’t worked that way the past five years, and it leaves us in the odd position of seeing the nature of fund flows change. The Bond Side The bond side of flows might actually be providing better signals. The overhyped and unimpressive non-traditional-bond category has been the top draw, while investors have turned bearish on bank-loan funds and high-yield bond funds. I like that trade. I’d much rather own bank loans and high yield than nontraditional bond. However, bank loans and high yield do face liquidity risks as outflows could be a challenge to manage. Still, I see some reward potential to go with those risks. œ So, I’m sharing the information for those who want to follow the strategy to the letter—but I wouldn’t do it.