11
Morningstar FundInvestor
May 2
013
There are telltale signs for spotting a mutual fund
in trouble, such as the departure of a proven manager
or a prolonged period of underperformance that
suggests the underlying process is broken. If those
factors are coupled with high fees or a regulatory
issue with the parent firm, it becomes easy to see
why investors should avoid certain funds.
Add to that list of signs a Negative Morningstar
Analyst Rating. The Morningstar Analyst Rating is a
relatively new indicator of a given fund’s prospects,
launched in late
2011
. But the rating’s five rankings—
Gold, Silver, Bronze, Neutral, and Negative—are
rooted in mutual fund analysis Morningstar has been
conducting for more than
25
years. Notably, the
ratings are based on fundamentals within five pillars:
People, Process, Parent, Performance, and Price.
Morningstar has assigned an Analyst Rating to
1
,
175
funds, with
49
receiving a Negative rating. As you
will see from the mutual funds mentioned below, in
many cases a Negative rating is the culmination
of several factors working against a fund that leads
Morningstar’s analysts to believe it is incapable of
beating its peers.
While high-yield muni funds employ a wide range of
strategies, the one in place at
Goldman Sachs
High Yield Muni
GHYAX
veers toward the aggressive
end of the spectrum. The fund has historically held
single-digit exposures to tobacco and airline bonds.
That may not seem like a lot in an absolute sense,
but those two sectors rank among the muni world’s
most volatile. Indeed, the fund has had a mixed
record during its
13
-year run, including big losses in
the
2007
-
08
downturn. Its exposure to the Florida
land-secured sector caused it to lag a majority of
peers in
2009
, a time when its bold approach should
have worked more in its favor. The fund’s rating is
also affected by the faults of its parent firm, which
has endured a fair share of turnover.
A good parent rating doesn’t prevent a Negative. For
example, Morningstar has a positive outlook on
Franklin Templeton’s stewardship. But
Franklin Tem-
pleton Founding Funds Allocation
FFALX
receives
a Negative rating because of high fees. This fund
of funds invests in three offerings:
Franklin Income
FKINX
,
Templeton Growth
TEPLX
, and
Mutual
Shares
TESIX
. However, its high
1
.
06%
annual ex-
pense ratio means investors can buy the three
funds in equal amounts on their own and pocket
the difference.
Fees are also an issue at Negative-rated
Templeton
Developing Markets
TEDMX
, whose poor perfor-
mance record has eroded confidence in the manage-
ment team. The fund hasn’t really found a market to
its liking in more than
10
years.
The Morningstar Analyst Rating is also applied to
target-date funds. A glide path that sports aggressive
exposures to equities much later in life than most
peers is behind the Negative rating for the Alliance-
Bernstein Retirement Strategy target-date series.
That stance had led to one of the worst performance
records in the target-date universe. A lack of man-
ager investment in the series doesn’t build confidence
in its managers, either.
Management concerns also play a factor in the Nega-
tive rating for Schwab’s target-date lineup. Four
different management teams have guided the series
since its
2005
launch—an alarming degree of
turnover.
œ
Contact Rob Wherry at
These Funds Have Big Flaws
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.
