11
Morningstar FundInvestor
June 2
014
The Morningstar Analyst Rating is a handy way to
find great funds that our analysts like, but it can also
help identify funds worth avoiding. Funds with an
Analyst Rating of Negative have significant problems
that cause our analysts to advocate steering clear.
These can include instability in personnel or strategy,
poor performance, high expenses, or (most com-
monly) some combination of these factors.
Only a relative handful of funds actually have a Nega-
tive Analyst Rating. There are plenty of bad funds
out there, but Morningstar’s analyst resources are
limited, and so our coverage is heavily skewed
toward good funds that interest our readers. Here are
a few funds that have been rated Negative so far
in
2014
, along with the reasons investors should be
wary of them.
Russell LifePoints Balanced Strategy
RBLEX
This fund is part of Russell’s LifePoints funds-of-funds
lineup. The lineup includes
10
target-date funds and
five target-risk funds, of which this fund is the largest
at $
3
.
7
billion in assets. As in the other LifePoints
funds, its portfolio consists of roughly a dozen under-
lying Russell funds, each of which, in turn, consists of
sleeves run by multiple subadvisors. All in all, there
are
80
subadvisors represented in this fund’s portfolio,
which targets a roughly
60
/
40
stock-bond allocation.
The idea is to allow manager Brian Meath to tailor
the portfolio appropriately by finding the best under-
lying funds and subadvisors, but there has been a
disconcerting amount of turnover, both in the man-
agers of the underlying Russell funds and in the
subadvisors who manage the sleeves. (Meath himself
has only been in place since January
2014
.) Addi-
tionally, most of the underlying funds have trailed
their peers over the long term, and this fund has
trailed the moderate-allocation Morningstar Cate-
gory over the past three, five, and
10
years. Add in
expenses that are relatively high across all share
classes, and the picture is not pretty.
Federated Prudent Bear
BEARX
Until
2008
, this fund was managed by David Tice,
who compiled one of the best track records of
any bear-market fund with a strategy that involved
selectively betting against individual stocks as
well as index futures. Since Federated bought the
fund and Tice left, manager Doug Noland has
de-emphasized stock-picking, preferring to time the
fund’s market exposure through short S
&
P
500
futures contracts and exchange-traded funds.
Although the fund has technically beaten the bear-
market category in each of the past five years, that
just means that it has lost slightly less than its
average category peer in a bull market. Nearly all of
those category peers are passive bear funds, many
of them leveraged, meaning that they will lose signifi-
cantly more than the market gains in an up market.
This fund’s active management is supposed to set it
apart, but its stock selection has actually hurt
returns in recent years.
AllianceBernstein International Growth
AWPAX
This fund has also gone through a lot of changes
during the past decade while putting up poor results,
with AllianceBernstein frequently adding and
subtracting personnel. Seventeen different people
have been listed as portfolio managers on this
fund at various times since the beginning of
2007
,
and two years ago the firm cut back its global-
growth analyst team, which now has barely half as
many members as it did at the beginning of
2012
.
This tinkering has not helped results, as the fund has
ranked in or near the foreign large-growth category’s
bottom quartile in five of the past six calendar years.
In addition, AllianceBernstein as a whole has suffered
from instability, outflows, and poor performance,
resulting in a Negative Parent rating that contributes
to the fund’s overall Negative Analyst Rating.
œ
Contact David Kathman at
3 Unimpressive Funds
Red Flags
|
David Kathman
What is Red Flags?
Red Flags is designed to alert
you to funds’ hidden risks. Such
risks can take many forms,
including asset bloat, the depar-
ture of a solid manager, or a
focus on an overhyped asset
class. Not every fund featured in
Red Flags is a sell, and in fact,
some are good long-term hold-
ings. But investors should be
prepared for a potentially bum-
pier ride in the near future.
