11
Morningstar FundInvestor
March 2
013
It’s been more than
20
years since the Morningstar
Style Box was first rolled out. The style box gives
investors an easy-to-understand idea of what types of
stocks their mutual funds own by looking at both
market capitalization and value-and-growth character-
istics. Focusing on whether a fund falls into the small-
cap-growth or large-blend boxes is important because
different styles of investing carry different risks.
The style box can be useful when building diversified
portfolios, but it can also be an effective tool for
spotting trouble. For example, there are legitimate
reasons for why a fund would shift from one area
of the style box to another. A value offering with a
low turnover strategy can move into the growth
and blend areas as its best positions run. A multicap
fund can shift along the market-cap spectrum
depending on where its manager is finding compel-
ling ideas. That said, a move across the style box
can be a signal a new manager is making changes or
an existing skipper is diverting from the fund’s
intended strategy. Both are events worth monitoring.
Below we look at a few funds that have shifted
along the style-box matrix. They each have a low
style-consistency rating.
Weitz Value
WVALX
This fund’s shift the past few years between the
large-cap value, blend, and growth style boxes stems
from it shedding an all-cap mandate for one that
focuses on large caps and from the influence of co-
managers Brad Hinton and David Perkins, who
have taken on a larger role here. Longtime manager
Wally Weitz has a penchant for capital-light, free-
cash-flow-generating firms. This often led to large
helpings of media and financial-services firms,
which hurt during the
2008
downturn. Since then, the
fund gradually has taken on greater large-cap
exposure as a way of reducing risk. Now, Hinton
and Perkins are buying capital-intensive firms in the
energy and materials sectors along with technol-
ogy stocks. The portfolio is still concentrated around
27
positions. But it is less a contrarian offering
than in the past since Hinton and Perkins require a
greater margin of safety. While the fund’s style-
box shift is worth watching, it hasn’t diminished its
positive attributes or its Morningstar Analyst Rating,
which stands at Silver.
Fidelity Small Cap Stock
FSLCX
Manager changes are often behind a style-box move.
This fund landed in the mid-cap blend style box
in
2009
-
10
, when it was run by manager Andrew Sas-
sine. He was replaced by Lionel Harris in
2011
,
and the fund has shifted into the small-growth style
box. The move makes sense because Harris is
using a similar process here that he used at his pre-
vious charge,
Fidelity Small Cap Growth
FCPGX
.
He favors fast-growing companies with durable cash
flows and strong management teams. The result of
that strategy should be a fund with a more measured
risk/reward profile as well as a more consistent
small-cap-oriented portfolio.
Fidelity Capital Appreciation
FDCAX
It’s not surprising to see this fund on this list. Manager
Fergus Shiel, who took over here in
2005
, has
wide latitude when it comes to looking for stocks with
expanding P/E ratios. Shiel can buy both growth
and value stocks, all along the market-cap spectrum,
and he can venture overseas, too. Shiel also trades at
a more rapid pace than peers. At
169%
, the fund’s
turnover is more than double the large-growth cate-
gory average. That process has caused the firm to
move between the large-cap growth, blend, and value
style boxes the past three years. The fund’s annual-
ized
6
.
1%
gain through Feb.
28
,
2013
, during Shiel’s
tenure outpaces the
4
.
5%
for the large-growth
peer group.
œ
Contact Rob Wherry at
Funds Showing Inconsistent Tendencies
Red Flags
|
Rob Wherry
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
departure 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
holdings. But investors should
be prepared for a potentially
bumpier ride in the near future.
