3
Morningstar FundInvestor
February 2
014
Let’s look at a few that did surprise me.
Neuberger Berman Genesis
NBGNX
has very large
stakes in rather small names. Thus, the fund’s
2
.
7%
bloat ratio is the highest in the mid-growth category.
Its turnover rate is just
20%
, but its asset size is a
massive $
14
.
6
billion. Management has built a strong
long-term track record even though the fund has a
weak five-year return. We rate it Silver because of
that record, but it certainly faces a big handicap
in managing so much in a focused portfolio of small-
and mid-cap names.
Appleseed
APPLX
is a real surprise. The fund’s
63%
turnover rate and $
305
million asset base don’t indi-
cate that there’s a bloat issue. Digging down into the
portfolio, there’s another odd thing. It seems that
many of the fund’s holdings represent no more than
one or two days’ trading volume. Yet, the fund owns
a massive
31
days’ trading volume in
John B. Sanfil-
ippo
JBSS
, and it also owns a couple of Canadian
gold closed-end funds. Sanfilippo is a micro-cap name
that would be quite hard for the managers to trade
quickly. Yet, much of the rest of the portfolio is quite
liquid, as the managers have pointed out in the past.
So, in this case I’m not too worried, though I really
hope they’re right about Sanfilippo.
Fidelity OTC
FOCPX
and
Fidelity Capital Appreci-
ation
FDCAX
are similar enough to be lumped
together. Managers Gavin Baker and Fergus Shiel run
these funds in the classic Fidelity style: fast-trading
growth funds that aim to always be ahead of the
curve. Peter Lynch and Will Danoff showed how great
that strategy can work, and scores of other Fidelity
managers showed just how hard it is to make it work.
At the moment, Baker and Shiel are on a roll, as
2013
was an ideal setting for their strategy.
Yet the bloat ratio reminds me why I wouldn’t want
to rate these funds higher than Bronze. Fidelity Capital
Appreciation has $
8
.
5
billion and a
140%
turnover
ratio, while Fidelity
OTC
has $
10
billion and a
116%
turnover ratio. That means they are moving a lot of
stock in large volumes. Normally, I don’t worry about
a large-cap fund around $
10
billion, but I do think
these funds are not that far from having some capa-
city challenges. At the moment, neither is seeing big
inflows but that certainly could change after their
lights-out returns of late. Not only is that a concern
on the bloat front, but, from a Morningstar Investor
Returns standpoint, it worries me that people would
be buying high and possibly setting themselves up to
sell low in a correction.
Conclusion
As I wrote, bloat ratio is a useful measure to see
if a fund is running up a big trading bill. However,
it’s not something to put at the top of your selection
criteria. We have posted bloat ratios for all the
actively managed U.S. equity funds in the Morningstar
500
on
mfi.morningstar.com
. I’ll update the data
occasionally so you can keep tabs on your funds.
œ
Bloat Year 2002–07
Quintile
Average
Bloat Ratio
Subsequent
5-
Y
r Return %
Subsequent
5-
Y
r Rank
5-
Y
r Percentile
Rank
Subsequent 5-Yr
Morningstar Rating
1
0.0113
14.96
56
42.45
2.59
2
0.0524
15.52
53
29.13
2.86
3
0.1331
15.59
50
37.27
2.94
4
0.3285
15.99
46
45.95
2.99
5
1.9282
16.34
47
50.68
3.01
Bloat Year 2007–12
Quintile
Average
Bloat Ratio
Subsequent
5-
Y
r Return %
Subsequent
5-
Y
r Rank
5-
Y
r Percentile
Rank
Subsequent 5-Yr
Morningstar Rating
1
0.0048
3.57
44
57.49
3.29
2
0.0263
3.03
49
32.02
3.01
3
0.0714
2.94
51
34.50
2.90
4
0.1855
3.19
49
39.39
2.97
5
0.9564
2.66
53
39.81
2.76
Bloat’s Predictive Power
Pre-expense returns. Data as of Dec. 31, 2013.
