11 / 772
9
Morningstar FundInvestor
January 2
015
Thus, you get some real individual stock risk tempered
by the emphasis on steady businesses. Compared
with most mid-growth funds, this one has a drastic
underweighting in health care and tech. And because
FPA
funds without “Crescent” in the name continue to
labor in obscurity, there’s little chance this fund will
suffer from asset bloat anytime soon.
Akre Focus
AKREX
is another atypical growth
fund worth investigating. Chuck Akre runs a focused
steady-growth portfolio that rarely ventures into
health care and technology. Akre buys “compounding
machines” with high cash flow, strong management,
and the ability to reinvest cash at a high rate of return.
Instead of the
Apples
AAPL
and
Teslas
TSLA
common to growth funds, you see
MasterCard
MC
,
American Tower
AMT
, and
Danaher
DHR
. Akre
has built a great record here and previously at
FBR
Focus (now
Hennessy Focus
HFCSX
).
Small Growth
Conestoga Small Cap
CCASX
really fits the unloved
mold. The fund, which has a Morningstar Analyst
Rating of Silver, had a great record until its pratfall in
2014
when several of its top tech stocks got whacked.
The long-term returns here remain solid, though,
and it seems appropriate to have one truly unloved
fund with rebound potential.
T. Rowe Price Diversified Small Cap Growth
PRDSX
shows that quantitative funds can still
deliver. Since
2008
, many quant funds have had
their circuits blow, but this fund has been a real
steady performer. Manager Sudhir Nanda runs a
low-turnover diffuse portfolio that has produced
strong results. Quant models crunch numbers on
valuations, earnings quality, and financial health
to produce a portfolio of more than
200
names.
Meridian Growth
has tremendous promise,
although it isn’t the easiest to buy into. The Legacy
share class,
MERDX
, is widely held but closed,
so new investors have to go through the Investor
shares,
MRIGX
, which have a
$99
,
999
minimum
investment. Sorry if that is a deal-breaker, but I think
it’s compelling if you can get in. Chad Meade and
Brian Schaub are focused growth investors who built
a brilliant record at
Janus Triton
JATTX
. The
duo looks for fast-growing companies with strong
competitive advantages. The fund holds a mix
of aggressive tech names like
Cadence Design
Systems
CDNS
alongside cheaper steadier stocks
like property manager
Jones Lang LaSalle
JLL
.
Avoid the Loved
So, what are the most-loved categories? Foreign
large blend drew the highest flows in
2014
, followed
by large blend and emerging markets. The strategy
suggests dialing down exposure to these categories.
However, I’m not sure I’d go too far with that. Those
first two are core categories that you should
always own. If you read the cover story, you know
I think emerging markets are relatively attractive.
So, I’m sharing the information for those who want to
follow the strategy to the letter—but I wouldn’t do it.
Historically, flows have followed performance, and
that’s why the strategy has been a winner. It leads
you to relatively cheap asset classes and away from
pricey ones. But since
2008
, performance and flows
have decoupled on the asset-class level even though
they continue to be linked on a fund level.
Now flows are more linked to headlines. Some
people have taken a pessimistic (albeit incorrect)
view of America’s economy and looked to China
as a superior bet. It hasn’t worked that way the past
five years, and it leaves us in the odd position of
seeing the nature of fund flows change.
The Bond Side
The bond side of flows might actually be providing
better signals. The overhyped and unimpressive
non-traditional-bond category has been the top draw,
while investors have turned bearish on bank-loan
funds and high-yield bond funds.
I like that trade. I’d much rather own bank loans and
high yield than nontraditional bond. However, bank
loans and high yield do face liquidity risks as outflows
could be a challenge to manage. Still, I see some
reward potential to go with those risks.
œ