11
Morningstar FundInvestor
August 2
013
Investors have flocked to certain types of funds in
recent years, but they haven’t always been as dis-
criminating as they could be. Yield-heavy funds have
attracted lots of assets, which is understandable
given the current environment of low interest rates,
but it’s a mistake to buy a fund based simply on
its yield. Nor is it smart to buy a fund having a great
track record without making sure that the manager
behind that track record is still around.
Here are some funds that have attracted big in-
flows of at least $
1
billion over the past year (from
June
2012
to June
2013
) but have Morningstar
Analyst Ratings of Neutral. That means they don’t
stand out from their peers, or they combine some
positive features with significant negatives.
Yield, but With Risks
Lord Abbett Short Duration Income
LALDX
has
ballooned in size from $
116
million in late
2007
to $
32
billion today, including inflows of $
10
billion in the
past year. A big factor in that exponential growth has
been the fund’s stellar five-year returns relative to
the short-term bond category, which it has achieved
with a strategy that favors bond sectors having
healthy yields and above-average credit risk. That
strategy has worked about as well as possible
over the past few years, but it has made the fund vul-
nerable to losses when credit risk gets punished,
which tends to happen every five to
10
years. That
risk, along with some turnover in the ranks of the
credit research team supporting the fund, led us to
assign a Neutral Analyst Rating.
Several Neutral-rated funds in other categories
have also attracted lots of assets quickly with yield-
focused strategies that come with attendant risks.
Principal Global Dividend Income
PGBAX
is now
an $
8
.
0
billion fund after attracting $
3
.
6
billion in
the past year, thanks to a three-year record that’s
among the best in the conservative-allocation cate-
gory. That record has earned the fund
4
stars, but only
an Analyst Rating of Neutral because of its short
track record and a strategy that relies heavily on high-
yield bonds.
Ivy High Income
WRHIX
also has $
8
.
0
billion in
assets, including $
2
.
2
billion in inflows in the past
year. Its relatively aggressive approach has given
it some of the best five-year returns in the high-yield
bond category, but also more credit risk than
its average peer, so investors should beware of
its downside.
Manager Changes
Other funds with big inflows have Neutral Analyst
Ratings because the manager responsible for
their great performance has recently left. That’s the
case for the $
6
.
7
billion
T. Rowe Price Health
Sciences
PRHSX
, whose top-decile
10
- and
15
-year
returns have earned it
5
stars and nearly $
1
billion
in recent inflows. Longtime manager Kris Jenner left
in February along with two experienced analysts.
It remains to be seen whether new skipper Taymour
Tamaddon, previously an analyst on the fund,
can maintain Jenner’s sterling record, but the fund
has continued to attract inflows since Jenner
left, suggesting that investors aren’t too worried.
Similarly, Chad Meade and Brian Schaub of
Janus
Triton
JATTX
left in May after putting together an
excellent long-term record that attracted $
1
.
1
billion
in inflows over the past year and earned the fund
5
stars. New manager Jonathan Coleman is experi-
enced, but his mediocre recent track record at
Janus
Fund
JANSX
makes this fund’s future much more
uncertain. However, some investors have noticed the
change. The fund saw $
62
million in outflows
in June.
œ
Contact David Kathman at
Popular Funds With Neutral Ratings
Red Flags
|
David Kathman
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.
