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15
Morningstar FundInvestor
May 2016
During the past five years, low-cost funds have
attracted strong inflows at the expense of pricier
funds. Funds with expense ratios ranking in
the least-expensive quintile of all funds (“low-cost
funds”) attracted an aggregate
$1
.
7
trillion of
estimated net inflows, compared with
$372
billion
of net outflows for funds in the remaining four
quintiles (“more-expensive funds”) during that time
period. Within the lowest-cost quartile, passive
funds have accounted for an average
75%
of flows
during the past five years, with active funds
accounting for the remaining
25%
.
More recently, the pattern of flows has diverged even
more; in
2015
, low-cost funds saw
$303
billion in
inflows, while more-expensive funds suffered
$260
billion in outflows. This largely explains the
3
-basis-
point decrease in the asset-weighted average fund
expense ratio to
0
.
61%
in
2015
.
Sequoia Reopens
Sequoia
SEQUX
reopened to new investors on April
29
in the wake of outflows and poor performance.
Manager David Poppe had said earlier in the month
that he was considering reopening the fund: “We’ve
had a number of requests from investors who
would like to get into the fund at these levels, so we
are considering recommending to the board that
Sequoia reopen in the proximate future.” Poppe wrote
in his latest letter to shareholders: “Prospective
investors should keep in mind the fund has significant
unrealized capital gains and should consult with
their tax advisors before investing.”
Foreign Stocks Draw Most Money
Foreign large-blend funds drew
$21
.
2
billion in net
new purchases in the first quarter of
2016
to lead the
fund world in flows. Intermediate bond (
$16
.
7
billion)
and large blend (
$7
.
6
billion) followed. Nontraditional
bond was hardest hit with
$10
.
7
billion in outflows,
followed by large growth and world allocation with
$10
.
2
billion and
$8
.
5
billion in outflows, respectively.
Viewed by fund company, Vanguard took in
$55
billion
in net inflows, followed by
DFA
with
$7
.
6
billion and
DoubleLine with
$6
billion. American Funds was note-
worthy with
$4
.
8
billion in inflows, as the firm had
been suffering outflows in recent years.
T. Rowe Price Small-Cap Stock Downgraded
T. Rowe Price Small-Cap Stock
OTCFX
manager Greg
McCrickard announced he’ll step down from the
fund as of Oct.
1
,
2016
, after a successful
24
-year tenure.
He’ll remain at the firm in a role mentoring analysts.
As a result of the change, the fund’s Morningstar
Analyst Rating has dropped to Neutral from Silver.
Successor Frank Alonso joined T. Rowe in
2000
and
has worked alongside McCrickard since
2013
as
the fund’s associate portfolio manager. That role gives
him familiarity with the fund’s holdings, and he’ll
benefit from a six-month transition period. His experi-
ence as a diversified manager dates back to October
2013
, when he took over the
T. Rowe Price US Smaller
Companies Equity
strategy, which is available to
investors outside the United States. During his tenure
through March
2016
, it outperformed its Russell
2500
benchmark by nearly
2
percentage points annualized.
It’s encouraging that Alonso posted good results
during his short tenure at T. Rowe Price
US
Smaller
Companies Equity, though there are some differ-
ences. That strategy is a small/mid-cap fund with a
higher average market cap. Because of a smaller
asset base, the portfolio has been leaner than this
fund, recently owning
200
stocks to this fund’s
311
. There will be more to keep an eye on here, though
Alonso owned
113
holdings in common with this
fund as of December
2015
.
T. Rowe has a strong history in small-cap investing, and
Alonso has good analytical resources at his disposal.
However, his tenure on the small-cap team only dates
to
2013
, and he will be running significantly more
assets here (
$10
billion) than currently (
$800
million).
That may take some getting used to.
K