Six good funds are hit with outflows, but three small good funds are seeing inflows.
This is an excerpt from the July 2017 issue of Morningstar FundInvestor. Data have been updated through July 2017. Download a complimentary copy of Morningstar FundInvestor by visiting the website.
Generally, investors are going in the right direction. They are buying well-run low-cost funds and selling high-cost failures. But that’s not always the case. Investors also tend to lean too heavily on short-term performance. There are some funds where you should not follow the crowd.
I found very good funds with poor three-year returns, and some mediocre funds with strong three-year returns. A three-year figure tells you more about luck than skill, yet fund flows imply that it’s really all skill. But that’s something you can use to your advantage. I looked at funds whose one-year organic growth rates (net flows as a percentage of assets at the beginning of the year) signal that investors are headed in the wrong direction.
Keep the Faith in These Funds
FMI Large Cap FMIHX, with a Morningstar Analyst Rating of Gold, seems to have attracted a fickle crowd. The fund’s three- and five-year returns are a bit below the large-blend Morningstar Category median, but its 10-year returns of 8.2% remain in the top 10%. Yet more than $2 billion has fled the fund in the past 12 months. We remain confident in the Milwaukee-based team, led by Pat English. With a focused portfolio, some bumps are to be expected. The team members look for cheap stocks with high returns on invested capital. Lately, they’ve been adding to holdings such as Unilever UL and AmerisourceBergen ABC. These aren’t thrilling names, but they are high-quality companies that should hold up well in the next downturn.
BBH Core Select BBTEX is another focused, quality stock fund that has fallen out of favor. Outflows led it to reopen to new investors, and this looks like a good chance to get in. Managers Tim Hartch and Michael Keller seek out companies with strong balance sheets, healthy cash flow, and high returns on cash flow. Although that typically leads to great companies, the fund hasn’t been in sync with the market of late. Yet, over Hartch’s tenure, it has easily outpaced the Russell 1000 Index with less risk than the market.
Artisan Small Cap ARTSX has seen $450 million go out the door, but we rate it Silver. We like lead manager Craigh Cepukenas and the growth team that he joined in 2009. He’d been a comanager since 2004 but moved to the growth team led by Andy Stephens. Cepukenas kept the fund’s emphasis on earnings growth, but added a couple of strategic wrinkles from his new growth team: greater conviction in top names and an aversion to cyclical names. Although performance has been middling, the fund enjoyed a nice rally in the first half of 2017. I’ll be interested to see if the fund reopens in the near future.
Litman Gregory Masters International MSILX has shed $337 million largely because of losses in 2015 and 2016 that were driven by European financials and an underweighting in Japan. The Bronze-rated fund has recouped some ground with a 16% return in the first half of 2017 that owes to some of the same factors that hurt it the previous two years. The fund is run by five subadvisors that each select eight to 15 names for the portfolio. It’s a strong group led by Harris Associates’ David Herro; Northern Cross veterans James LaTorre, Howard Appleby, and Jean-Francois Ducrest; and Lazard manager Mark Little. Despite the slump, the fund still has a solid long-term record.
AllianzGI NFJ Small-Cap Value PCVAX has really shrunk. The fund lost $1.6 billion in outflows, and we downgraded its rating to Bronze from Silver. The managers have stayed true to their knitting, but stock selection has left them behind. On the plus side, we like their mix of deep value and dividend quality as well as their consistency in process if not performance.