Ten-year anniversaries could lead to big changes in their ratings.
The Morningstar Rating for funds is a great starting point for investors researching funds on their own. It measures risk-adjusted performance over three, five, and 10 years and--recognizing that investors' tolerance for losses often isn't as great as they think--punishes funds more for poor downside performance than it rewards them for huge returns in rallies. (Here's a link to the methodology behind the rating.) Thus, the star rating can help investors sort through the universe of funds and find those that make excellent long-term holdings.
However, funds that aren't quite 10 years old and have nine-year returns are sometimes likely to see big shifts. Since the funds' star ratings are based on three- and five-year returns at that point, they don't necessarily reflect how well or poorly the fund has done over its life span. Below, we take a closer look at notable funds that fit this profile and thus may deserve either more or less attention from investors than they're getting based on their star ratings.
Dodge & Cox International Stock
This fund's risk-adjusted returns took a big hit when it lost a hefty 47% in 2008's sharp decline, in part because of the fund's big stake in emerging markets. But its managers' calls have often been spot-on; the fund has posted top-quartile showings in six of its first nine calendar years of operation. The fund actually hit its 10-year anniversary just a few days ago but won't get a 10-year star rating until the end of May. Although the fund has been more volatile than its typical foreign large-value peer, it probably will to earn a higher rating at the 10-year mark since it's beaten all but two of its category peers over the past decade.
Royce Value Plus
A 2-star rating reflects this fund's subpar relative performance over the past five years; it's lagged about two thirds of its small-growth peers over that stretch. But the current rating doesn't take into account much of its glorious first five years, when it finished in the category's top quintile each year from 2002-06. Indeed, it's still the best-performing small-growth fund over the past nine years.
The fund's recent struggles owe in part to poor picks within technology and banking. Expect more consistent stock selection based on the firm's history, but the fund will be hard-pressed to match its strong start again anytime soon. An explosion in assets in 2006 led the portfolio to balloon from 50 stocks to more than 100, thus diluting the effects of its winners. Thus, the fund probably won't be a worldbeater. But its prospects are very likely better than its current star rating might suggest.
Artisan International Small Cap
This fund has a lot going for it, but its recent performance hasn't been great: It lands in the foreign small/mid-growth category's bottom third over the past three years. Manager Mark Yockey, who also runs Artisan International
Columbia Mid Cap Value Opportunity
This fund has been through some changes over the past year and a half. First, former lead manager Warren Spitz stepped off the team in November 2009 to focus on a newly launched infrastructure fund. Then in 2010, this fund's name changed from RiverSource Mid Cap Value, following the acquisition of Columbia Asset Management by Ameriprise Financial (which owns the RiverSource funds). In the meantime, the fund's recent record has been unimpressive--a bad 2008 put a serious dent in returns, and it's looked just OK since Spitz left. However, current lead skippers Laton Spahr and Steven Schroll have been managers on the fund since 2003 and have played a significant role in the fund's long-term performance--it's outpaced more than three fourths of its rivals over the past nine years. And Spitz, who's still at the firm, can serve as a sounding board for the team. The fund still holds a lot of promise.
HighMark Cognitive Value
This fund lags the small-value category norm by a wide margin since its May 2001 inception, thanks in part to bottom-half showings each year from 2002-06. Since then, performance has perked up, and that improvement coincides with the start of manager Thomas Mudge III's now five-year tenure. Nevertheless, the fund has turned in middling returns on his watch, albeit with mild volatility. Still, it faces a likely drop in its star rating.