8
We give more funds a Neutral rating than any other,
which makes sense because a Neutral-rated fund
is one where there isn’t sufficient evidence to believe
it will produce superior long-term risk-adjusted per-
formance. If we rated every single fund, the Neutral
camp likely would be the largest—so many funds
fit into that description. The medalists are three
shades of recommended, and Negative funds are not
recommended. Thus, if we rated them all, the total
medalists probably would be about the same as the
total in Negative. There are quite a few different
flavors of Neutral, and I’ll walk you through each one
with some examples.
The Unknown
For a lot of funds, there’s just not enough information.
New managers with no prior track records fit here,
as do funds with new strategies. When we first hear
about changes, we may talk with the new managers,
but we can’t be sure how they’ll execute their strate-
gies until we’ve seen a few portfolios. Even after
a year or so, we still might not have much of a track
record to go on.
We rated
Fidelity Equity-Income
FEQIX
and
Fidelity
Equity Dividend Income
FEQTX
as Neutral a little
more than a year after both made manager and
strategy changes. Fidelity wanted to emphasize the
dividend part of its equity-income funds, which had
long since lost interest in income. So these changes
made a lot of sense, but there are other equity-
income funds with proven managers and strategies.
At Equity Dividend Income, new manager Scott Offen
aims for a yield that is
1
.
5
times the S
&
P
500
’s. Offen
had a decent, though not outstanding, record at his
previous charge,
Fidelity Value Discovery
FVDFX
.
However, Value Discovery ran a more freewheeling
value strategy compared with his new straightfor-
ward emphasis on dividends. So even though Offen
isn’t new to managing, he’s pretty new to the
strategy. Thus, we don’t have enough to recommend
it. Manager changes at
Meridian Growth
MERDX
,
Janus Global Select
JORNX
,
Legg Mason Capital
Management Value
LGVAX
,
Laudus Growth
Investors U.S. Large Cap Growth
LGILX
, and
Col-
umbia Value and Restructuring
UMBIX
spurred
us to rate the funds Neutral.
In cases like Columbia Value and Restructuring and
Janus Global Select, the new managers have track
records, but with different strategies than the ones
they employ today. So we want to know more about
their new strategies and see whether they can add
value with them. The new managers at Laudus
Growth Investors were promoted from the analyst
ranks; the strategy likely won’t change, but we
don’t know if they will have the skills of their prede-
cessor. At a minimum, they lack his experience.
Big Positives and Big Negatives
Sometimes, it’s not so much a lack of information as
it is some strong signals in both directions canceling
each other out. For example,
CGM Focus
CGMFX
has a very experienced manager in Ken Heebner and
top-percentile returns for the trailing
10
- and
15
-
year periods. Heebner practices an extremely aggres-
sive style that involves fast moves in and out of
sectors and even bold short bets against a stock or an
industry. Most recently, Heebner went
15%
short on
Treasuries. But here’s the catch: Heebner is in his
70
s
and he doesn’t appear to have much backup.
Given the extreme risks, it really makes sense only
if you can make the fund a holding for more than
10
years, and it’s awfully tough to say who will be
running the fund in
10
years. For shorter periods,
there’s no telling what the fund will do. Its five-year
returns are the worst in its category.
Marsico Focus
MFOCX
is another case where the
long-term returns were good, the recent term is
weak, and the future is cloudy. Tom Marsico runs a
focused growth strategy that is riskier than most
funds, though not in
CGM
’s league. The story isn’t as
The Big Tent That Is the Neutral Rating
Morningstar Research
|
Russel Kinnel
