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Morningstar FundInvestor
February 2
015
At Morningstar, we’ve always paid a lot of attention
to fund expenses. Plenty of evidence shows that
cheap funds outperform expensive ones over time,
and that expenses are one of the best predictors
of future fund performance in general. That’s
why Price is one of the five Pillars that go into the
Morningstar Analyst Rating for funds.
It’s easy to overlook a fund’s price tag when it’s
performing well, but that’s short-sighted, because
every fund will cool down eventually. Here are
three funds from the Morningstar
500
that had great
years in
2014
, ranking in the top decile of their
Morningstar Categories, but which also have Morn-
ingstar Fee Level ratings of High or Above Average,
meaning they’re more expensive than their typical
peer. That doesn’t mean they’re bad funds—in fact,
two of them have Analyst Ratings of Silver. But these
funds’ high price tags are a headwind to future
performance, one that’s likely to become more signifi-
cant when market conditions aren’t as favorable.
PIMCO Global Multi-Asset
PGMDX
All of this fund’s share classes are more expensive
than their peers’. More than half of the fund’s
$1
billion in assets are in the Institutional shares, whose
0
.
49%
expense ratio is pricier than two thirds of
similar world-allocation share classes, and most of
the other share classes are in the most-expensive
quintile of their peer group. The fund gained
7%
in
2014
to rank in the world-allocation category’s top
5%
,
an impressive rebound from
2013
, when it lost
9%
and ranked near the bottom of the category. Most of
this great performance came under lead manager
Mihir Worah, who took over in early
2014
following
the departure of Mohamed El-Erian. But Worah took
on further responsibilities in September when he was
named co-
CIO
and comanager of
PIMCO Total
Return
PTTRX
following the departure of Bill Gross,
and the fund was rocked in December
2014
when
PIMCO
fired a key analyst, Rahul Seksaria, for executing
an improper trade nearly three years earlier.
Tweedy, Browne Global Value
TBGVX
This fund’s
1
.
37%
expense ratio is higher than almost
90%
of no-load foreign large-value funds. Despite
that headwind, it has compiled a very strong long-
term record by using a Warren Buffett-like approach
to overseas value investing, emphasizing high-quality
stocks with strong franchises. It was barely in
positive territory in
2014
with a
1
.
5%
gain, but that
was one of the best returns in the foreign large-value
category in a tough year for foreign stocks. However,
this outperformance came almost entirely from the
fund’s practice of hedging its foreign-currency expo-
sure into the U.S. dollar, which has been strong lately;
its
2014
return trailed the
MSCI
EAFE
100%
Hedged
Index benchmark by
4
percentage points. That’s
not too much reason for worry, given that the fund
has trounced the hedged benchmark over the long run,
but it might not look as good in the short term if the
dollar weakens.
Amana Growth
AMAGX
Price has always been the biggest issue tempering
our enthusiasm for this otherwise excellent fund.
Although its expense ratio has come down steadily
over the past decade, at
1
.
09%
it’s still more
expensive than two thirds of large-cap no-load funds.
Manager Nick Kaiser runs it according to the
principles of Islamic law, meaning that, in addition to
avoiding alcohol, tobacco, gambling, pornography,
or pork stocks, it can’t hold financials or overly lever-
aged companies. Despite these restrictions, the fund
sports some of the best
10
- and
15
-year returns
in the large-growth category, though it has struggled
over most of the past five years as low interest
rates have boosted capital-dependent firms. The fund
bounced back in
2014
with a top-decile
14%
gain,
driven by big gains in such top holdings as
Apple
AAPL
,
Amgen
AMGN
, and
Union Pacific
UNP
.
œ
Contact David Kathman at david.kathman
@
morningstar.com
Hot Performers With High Price Tags
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.