(PUB) Investing 2015

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11 Morningstar FundInvestor January 2015
Many large-cap U.S. equity funds saw losses in
December, but most ended 2014 with double-digit
gains. Are they now overvalued?
Morningstar’s stock analysts have developed a
measure of fair value, using a proprietary discounted
cash flow model to assess the more than 1,200
mostly large-cap names they cover. A stock with a
price/fair value ratio greater than 1.0 is considered
overvalued. This is not a perfect predictor for timing
purposes, but it does give some sense of overall
value. At the end of 2013 ’s rally, the median stock
covered by Morningstar had a price/fair value ratio
of 1.06. It remained overvalued through much of 2014
and ended the year at 1.03.
That’s not a bargain, and it’s higher than it was the
last time we calculated this ratio for Morningstar 500
funds at the end of 2012. At that point, the median
stock that Morningstar covered had a price/fair value
ratio of 0.94 , and the ratio for Vanguard 500 Index
VFIAX was 0.93.
As we did last time, we calculated a price/fair value
ratio for all the large-cap funds in the Morningstar
500. (We limited the search to those funds for which
we had a recent portfolio and fair value figures for
at least 75% of the portfolio.)
As of mid-December, Vanguard 500 Index was at 1.03.
As might be expected, the funds with the highest
ratios were generally growth funds. However, both
growth and value funds were still much more richly
valued than they were at the end of 2012 . More than
80% of the funds had ratios of 1.0 or higher. Two
years ago, none of the large-value funds on the list
were fully valued; this time, only a third were
priced below our calculation of fair value.
Large Value
Investors hungry for income and security have been
favoring solid dividend-payers for the past several
years. Two years ago, the priciest funds in the
category were dividend-oriented strategies, and the
same is true today. But this time these funds had
price/fair value ratios greater than 1.0.
Columbia Dividend Income GSFTX was again
among the priciest in the category, with a ratio of 1.03
(compared with 0.98 two years ago). It was tied
with TCW Relative Value Dividend Appreciation
TGIGX, and Vanguard High Dividend Yield Index
VHDYX was close behind.
Large Blend
Dividend-oriented funds were among the most over-
valued here, too. Amana Income AMANX was again
one of the most expensive, with a ratio of 1.06. It
holds only dividend-paying stocks and has avoided
financials—which are undervalued by this measure—
to abide by Islamic prohibitions on interest. Fidelity
Dividend Growth FDGFX had a ratio of 1.03, reflect-
ing its new manager’s strict focus on high-dividend
picks. Parnassus Core Equity PRBLX came in at
1.03, too. Oakmark OAKMX and Oakmark Select
OAKLX had among the lowest ratios in the category,
around 0.99—manager Bill Nygren has eschewed
high-yield picks.
Large Growth
As expected, most of these topped the list overall.
Two years ago, however, about one third of the cate-
gory had price/fair value ratios below 0.95. Now only
one (RiverPark/Wedgewood RWGFX ) was below 1.0.
Amana Growth AMAGX was one of the most expen-
sive at 1.10, reflecting its heavy overweighting
in technology and its great run for the year. The same
goes for Fidelity Growth Company FDGRX , at 1. 08.
Marsico Focus MFOCX clocked in with a ratio of 1.07.
The take-away? This valuation snapshot is no reason
to sell, or even avoid, these funds. But it may be
time to check in and rebalance. If you are buying,
dollar-cost average in—these funds may be better
values in the future. œ
Are Large Caps Getting Pricey?
Red Flags | Laura Lallos
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 depar-
ture 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 hold-
ings. But investors should be
prepared for a potentially bum-
pier ride in the near future.