18
“How can a fund with as poor performance as
Vanguard Precious Metals and Mining
VGPMX
earn a Gold rating?”
“Why do you give a Silver to
Janus Overseas
JAOSX
despite terrible five-year returns?”
It may appear we’re oblivious to evidence refuting
our ratings. I get an email along these lines
every couple of days. But the emails I get today are
nothing like the complaints I received about
recommending Bill Nygren’s
Oakmark
OAKMX
and
Oakmark Select
OAKLX
a few years ago.
I understand the questions, but five-year returns are
not as telling as we all wish they would be. That’s
particularly true for funds that have big biases rela-
tive to their category peers. Vanguard Precious
Metals and Mining invests in gold stocks like its
peers but also in diamond, copper, and potash
miners. As a result, the fund’s performance relative
to its category really tells you how those industries
are doing relative to gold rather than whether man-
ager Graham French is doing a good job. In fact,
five years ago Vanguard Precious Metals and Mining
was in the top percentile for its peer group, thus
illustrating my point.
While this fund’s biases are a little more extreme,
it’s really true of a lot of funds. A typical equity fund
may have a much different sector or market-cap
profile than its peers. Focused funds can rally or plum-
met on just a few holdings, as funds like Oakmark
Select have shown. A bond fund might have signifi-
cantly lower duration or higher credit risk than most
others in its category. As all of these factors go in
and out of favor, a fund’s returns will bounce up and
down. We try to adjust for those factors to see
whether a manager is really adding value.
I pulled out the June
2008
FundInvestor
to look at
what funds were Analyst Picks (the precursor of our
Gold rating) but had bottom-decile five-year returns.
There were five:
Clipper
CFIMX
, Oakmark Select,
Fidelity Dividend Growth
FDGFX
,
Weitz Value
WVALX
, and
Ariel Appreciation
CAAPX
. Four out of
those five produced top-decile returns over the
ensuing five years, and one, Clipper, was just a hair
below the category median. Overall, their average
performance ranking was in the top
15%
for the past
five years.
What about the Analyst Picks that were top-decile for
the past five years in June
2008
? The results are
pretty good but not as good as the hated five’s. The
15
in the top decile produced an average performance
ranking of
31
.
5%
in the ensuing five years. That’s still
pretty good. Three of the
15
were top-decile:
TCW
Total Return Bond
TGLMX
,
T. Rowe Price Global
Stock
PRGSX
, and
Oppenheimer International
Growth
OIGAX
. However, three were bottom-decile
over the next five years:
Schneider Value
SCMLX
,
Vanguard Precious Metals and Mining, and
Thorn-
burg Value
TVAFX
.
Looking for more contrarian ratings plays you can
make today, there’s Janus Overseas. The fund
has a distinct bias toward India that has made it
swing dramatically. Like Vanguard Precious Metals
and Mining, it could be a good contrarian bet.
FPA New Income
FPNIX
is another Silver-rated
fund with poor five-year performance that could
bounce back. The fund is run to the conservative side
of non-traditional-bond funds as well as its old peer
group in intermediate bond. Tom Atteberry is focused
on avoiding losses. His goal is beating the Consum-
er Price Index by
100
basis points a year. So, he’s not
trying to make big bets on market direction. Rather,
he’s trying to avoid big bets. If everything goes swim-
mingly in bond land, the fund may well look humdrum,
but if things hit the fan, it ought to provide
solid protection.
Finally, the
1
-star Silver-rated
Royce Low Priced
Stock
RYLPX
has suffered from Whitney George’s
fondness of materials stocks. A rebound in the world
economy could give this fund a nice snap back.
œ
Sometimes Our Weakest Choices
Turn Into Our Best
Tracking Morningstar Analyst Ratings
|
Russel Kinnel
What Are Morningstar
Analyst Ratings?
Our ratings are chosen for long-
term success. Analysts assess
a fund’s competitive advantages
by analyzing people, process,
parent, performance, and price.
They do rigorous analysis and
then submit their ratings to a
committee that vets their work
for thoroughness and consistency.
