11
Morningstar FundInvestor
September
2013
When Morningstar analysts evaluate a fund’s perform-
mance, their assessments are grounded in data but
ultimately reflect qualitative judgments. Analysts
don’t focus on just a fund’s total returns, for instance,
but on risk-adjusted results. And because analysts
try to determine how repeatable a strategy is, the con-
sistency of a fund’s performance patterns is also an
important consideration.
No strategy will succeed in every market, of course,
but a fund should shine when conditions favor
its approach. Occasional lapses won’t automatically
torpedo a fund’s rating, but they do raise red flags
that require further research.
Below, we look at three domestic-equity funds that
didn’t rise to the occasion. In the trailing three years,
small-cap funds bested large-caps, growth outpaced
value, and health-care and consumer-cyclical stocks
led the way. Momentum was rewarded in the period
and, in the form of volatility, so was risk: In the ag-
gregate, funds with above-average beta and standard
deviation outperformed milder rivals.
Brandywine
BRWIX
A swing to momentum should have benefited Brandy-
wine. Despite positioning near the market’s sweet
spot, this Neutral-rated fund has placed in its catego-
ry’s
99
th percentile for the past three years.
The fund’s five-,
10
-, and
15
-year returns are similarly
poor, and, unsurprisingly, management changes
have ensued. Lead manager Bill D’Alonzo remains in
place and currently works alongside Scott Gates,
who joined as a manager in
2011
. Longtime coman-
agers John Ragard and Ethan Steinberg came off
the fund in
2012
and
2013
, respectively.
Brandywine aims to figure out which companies will
beat their next quarter’s earnings estimates by
talking with store managers, doctors, and smartphone
sellers to find out which products are soaring and
which are failing. The problem is that thousands of
sell-side analysts are doing the same thing, and
that information becomes a commodity very quickly.
This explains at least part of why Brandywine has
failed to match expectations.
Calamos Growth
CVGRX
This Bronze-rated large-growth fund had several
factors working in its favor over the past three years.
It tilted far more heavily toward growth stocks
than most rivals, and its average market cap was far
smaller. As with Brandywine, the fund’s above-
average beta and standard deviation aligned with in-
vestors’ appetite for risk. Moreover, while the fund
sported a modest health-care underweighting relative
to its average rival, it overweighted consumer cycli-
cals—another outperforming sector in the period.
Despite those winning attributes, the fund badly
lagged its typical peer. In the trailing three years,
its annualized gain of
12%
, while decent in absolute
terms, trailed the category norm by
5
.
3
percentage
points and placed in the category’s
98
th percentile.
The fund’s five- and
10
-year returns are also sub-
par, and while its
15
-year showing remains topnotch,
one of the managers responsible for that track record
recently left both the fund and the firm.
Royce Focus Value
RYFVX
This mid-blend fund should also have benefited from
a below-average market cap over the past three years.
Its growth tilt should have helped as well.
Whatever benefit those attributes may have provided,
though, it wasn’t enough to stave off a drubbing.
Through the end of July, the fund’s annualized return
of
7
.
2%
placed in its category’s
98
th percentile. The
fund’s ill-timed foray into materials stocks caused the
most damage.
œ
Contact Shannon at
Funds That Whiffed on a Fat Pitch
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
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.
