11
Morningstar FundInvestor
February 2
014
The Morningstar
500
includes
54
funds with Morning-
star Analyst Ratings of Neutral, an indication that the
analysts who cover them believe their prospects for
outperformance over the course of a full market cycle
are poor or at least unclear. In the short run, though,
even middling (or worse) funds can have a great year.
That was true in
2013
, a year in which seven Neutral-
rated Morningstar
500
funds managed to earn spots
in the top decile of their respective peer groups.
Each of the funds highlighted below—
CGM Focus
CGMFX
,
Fidelity Blue Chip Growth
FBGRX
, and
Thornburg Value
TVAFX
—were among the M
500
’s
Neutral-rated overachievers. Current investors
should obviously be pleased with these funds’ results
last year, but as detailed below, prospective inves-
tors giving them a fresh look because of recent suc-
cess continue to have superior options among the
M
500
’s Medalists.
CGM Focus
During the past decade, Ken Heebner’s fund has
gone virtually everywhere, roaming the Morningstar
Style Box from small blend to large growth. The fund
currently resides in the large-blend category, but for
better or worse,
CGM
Focus is peerless. As of Sept-
ember
2013
, it had long and short positions, with U.S.
stocks exposure of roughly
130%
and a
35%
short
stake in bonds. That proved deft in
2013
, with the fund
gaining
37
.
6%
for a spot in the category’s top decile.
Its
15
-year track record is even more impressive. In
that period through
2013
, its
14
.
3%
annualized gain
ranks in the category’s top percentile.
Heebner deserves credit for what he’s achieved over
the long haul, but it’s tough to assess the repeat-
ability of a process that’s less a strategy than a series
of opportunistic lurches and extreme portfolio make-
overs. Outsized volatility and erratic performance
patterns have made the fund difficult to use well. In
the three- and five-year trailing periods, the fund’s
total returns as well as its dollar-weighted investor
returns rank in the peer group’s
99
th percentile.
CGM
Focus remains a fund best admired from afar.
Fidelity Blue Chip Growth
Since July
2009
, former tech analyst and
Fidelity
OTC
FOCPX
manager Sonu Kalra has led this large-
growth fund. Thus far on his watch, the fund has
fared well when equity prices rise, and
2013
was no
exception. Last year, the fund gained
39
.
8%
, sur-
passing the peer group norm by
5
.
9
percentage points
and the benchmark Russell
1000
Growth Index by
6
.
4
points. The trade-off has been poor performance
during declines. While Kalra hasn’t faced a sus-
tained sell-off during his time at this fund, a down-
capture ratio of
125%
versus the index doesn’t
inspire confidence. Nor does Fidelity
OTC
’s bottom-
quintile showing in
2008
with Kalra at the helm.
The fund does look considerably better versus typical
peers. Its losses still have been steeper during market
declines, and performance swings have been wider
than both the bogy’s and the category norm’s. Overall,
this is a middling fund in a competitive category.
Thornburg Value
Connor Browne and Edward Maran have been coman-
agers on this large-blend fund since February
2006
.
Until
2010
, though, they worked alongside lead
manager Bill Fries. As a duo, their track record is both
relatively short and, during market declines, disas-
trous. The fund got pummeled in the third quarter of
2011
, shedding
22
.
5%
versus losses of
15
.
8%
for the
typical peer and
13
.
9%
for the S
&
P
500
Index. While
the fund has been a modest outperformer in rising
markets since Fries left, it also has suffered
150%
of
the bogy’s declines and
141%
of the category’s.
That said, the fund’s performance has improved
since the managers reined in its risk profile in
mid-
2012
. Since then, the fund has topped the index
and the category norm in five of six quarters.
That’s encouraging, but more time is needed to see
if that success can be sustained, particularly in
light of Maran’s planned April
1
exit.
œ
Contact Shannon at
Don’t Chase These Hot Performers
Red Flags
|
Shannon Zimmerman
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.
