15
Morningstar FundInvestor
September 2
014
flat. Asset-weighted expense ratios count bigger
funds proportionally more than smaller ones. To be
fair, MainStay Marketfield’s fees have dropped
from
1
.
81%
in
2009
, but given how high they started,
they still have a long way to go before they’ll look
cheap relative to peers.
Arani: Stocks More Appealing Than Bonds
Fidelity Puritan
FPURX
manager Ramin Arani
stopped by our offices, and I had a chance to inter-
view him on the fund and markets.
Russ Kinnel:
Is running the equity sleeve of a
balanced fund different from running just an equity
fund without a bond sleeve attached?
Ramin Arani:
For the last seven years before I ran
Puritan for the last five, I ran an equity-only fund:
Fidelity Trend
FTRNX
. In some ways, that was very
different because all I had to do was worry about
what equity investments to populate the fund with.
While Puritan is a balanced fund, I have to set the
asset allocation between equities, investment-grade
fixed income, and high-yield fixed income. Within
that, when I run the equity subportfolio, it’s a little bit
different from when I ran Trend.
Though I would say my fundamental philosophy in
process is the same. I continue to look for companies
that are going to show better earnings growth
and more earnings power over time than the market
expects. It’s exactly what I did when I ran Trend;
that’s also how I invest the equity assets of Puritan.
That being said, the neat thing about Puritan being
a balanced fund is that you can think about the invest-
ment-grade subportfolio as providing a nice base
level of income for shareholders of the fund. Think of
it like the foundation of a house. In tough times,
the foundation will be there, it will be the bedrock, it
won’t lose you capital, and it should generate at
least a couple of percent of income.
Then, think about the equity subportfolio as the main
floor of the house. It layers on earnings growth and
dividend growth over time, which should then [bring
in]—for the shareholder and the fund—nice growth
and capital appreciation on top of the income. Then,
think about the high-yield component of the fund as
an opportunistic kicker.
So, when the opportunity presents itself, [the high-
yield component] can add the penthouse pool to the
house—some neat feature that really makes the
house exciting when the opportunity presents itself.
Given that construct, as I build the equity subport-
folio, I think about it within that framework, which is
obviously different than if you were just running an
equity fund.
Kinnel:
You’re also setting the asset allocation, which
is different. I know the fund starts with a neutral
60%
/
40%
stock/bond mix. Where are you today? And
what led you to that current weighting?
Arani:
The neutral allocation is about
60%
equities
and
40%
bonds. You should think about the fund oper-
ating within a
10
-point band around those neutral
points. So, thinking about the equity subportfolio: If
I’m less positive on equities, [the percentage of equi-
ties in the portfolio could be] less than
60%
all the
way potentially down to
50%
; if I’m more positive on
equities than bonds, you should think about the equity
subportfolio being as much as
70%
as opposed to a
neutral
60%
—obviously, there is room in between.
Really, since the spring of
2009
, the fund has been
overweight on equities; it’s been more than
60%
equities. In the last two years, it’s been over
65%
equities. In the last year-plus, it’s been about
70%
equities. So, I’ve clearly favored equities for the last
five years and even more so in the last two—really
since the summer of
2011
, which was a bit of a
choppy period. Coming out of that, I began to feel
much more positive about equities relative to bonds.
So, that’s been the allocation for the last couple of
years, which has served the fund shareholders well.
As we sit here today, I’m no longer at max
70%
[equi-
ties]; I’ve eased off of that a bit. But certainly as
I look at relative fundamentals and relative valuation,
I think it favors equities over bonds over the next
two to three years.
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