(PUB) Investing 2016

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11 Morningstar FundInvestor March 2016
Concerned that your stock funds seem much more
volatile lately? You aren’t alone: Vanguard 500
Index’s VFIAX one-year standard deviation was at
14.28 at the end of January, compared with 10.93
for the three-year period, and most diversified U.S.
equity funds show a similar pattern. As observed
in the July 2015 FundInvestor cover story, market vola-
tility declined after the financial crisis, but the
current three-year numbers may be the anomaly: Most
of the broad U.S. stock funds in the Morningstar
500 had 10-year standard deviations on par with or
even higher than the current one-year figures—
Vanguard 500 Index’s 10-year figure is 15.15. In other
words, this recent surge in volatility probably doesn’t
signal a dramatic departure from established strategies.
There were a handful of funds, however, with one-year
standard deviations significantly higher than their 10-
year figures. That could signal a change, perhaps for
the worse. One of those is Sequoia SEQUX . As has
already been discussed in a recent Red Flags, its enor-
mous stake in controversial Valeant Pharmaceuticals
VRX is the culprit. That fund is not appropriate for
shareholders who can’t handle such stances, though
we continue to give it a Morningstar Analyst Rating
of Gold. Below is a look into six more funds that have
had notable increases in volatility during the past year.
T. Rowe Price New America Growth PRWAX
This large-growth fund’s recent surge in volatility is
partly explained by the nearly 10% stake inAmazon.com
AMZN held by manager Dan Martino at year-end.
That was to the fund’s advantage in 2015, but not in
early 2016. Martino is leaving the fund on April 1,
and new manager Justin White expects to have more
of a valuation focus that would probably have pre-
cluded such a large stake in a pricey name. White is
an experienced analyst, but this is his first stint as a
portfolio manager, and this manager change, not the
fund’s increased volatility, explains the recent down-
grade of its Analyst Rating to Neutral from Bronze.
First Eagle Fund of America FEAFX
The recent surge in volatility owes partly to the fund’s
sector biases, with an overweighting in basic mate-
rials that is among the largest in the mid-blend
Morningstar Category. Some of its tech picks have had
sharp losses as well. However, we are still positive on
the fund’s process, which has led to moderate volatility
over the long term. While we downgraded the fund
to Bronze from Silver, that owes to problems at First
Eagle itself, stemming from improper use of fund
assets for marketing and distribution costs, as well as
a pending acquisition by two private equity firms.
Harbor Capital Appreciation HACAX
This fund showed its upside volatility with one of the
best showings in the large-growth category last year,
owing to high-priced, high-growth names such as
Amazon and Facebook FB—a focus that is driving
above-average losses in 2016. We remain confident
in Sig Segalas, who’s run the fund for 25 years, and
the rest of the growth team at Jennison Associates.
Mainstay ICAP Equity ICAEX
and Mainstay ICAP Select Equity ICSLX
These are both concentrated funds, particularly the
Select version, with fewer than 30 holdings. The
downside risk of such an approach was apparent in
both funds’ lagging returns during the past year.
We have concerns about changes on the manage-
ment and analyst teams, which are a particular
risk for a concentrated, distinctive strategy. Both
were downgraded to Neutral from Bronze in 2015.
Century Small Cap Select CSMVX
This fund had a good year in 2015 for a small-growth
strategy, ending the year in the black. Its losses for
the year to date aren’t extreme for the category, either.
While the fund’s long-term risk profile isn’t out of
line with the category norm, a concentrated portfolio
with pronounced sector bents is bound to be bumpy.
When we last rated the fund in 2014, our primary
concerns were lackluster performance and changes to
the investment team, not volatility. K
Contact Laura Lallos at
Beware of Rising Volatility
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
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.