Can these funds navigate through a 'new normal'?
Can These Funds Navigate Through a 'New Normal'?
Mutual funds have been buffeted by the economy's fortunes more than usual in the past several years-- particularly those that invest heavily in companies that have few (if any) competitive advantages. If economic growth proves to be sluggish in the near future (a real possibility as the ability to take on leverage is much more limited after the excesses of 2003-07) or dips again, these funds' holdings could struggle as investors favor companies with more-dependable revenue streams. Morningstar's equity analysts assign a moat rating to companies based on their assessment of the firms' competitive advantages. So we took a look at the average moat ratings of funds' holdings; we highlight the following three funds that sport very low average moat ratings.
It's not too surprising, then, that the fund's holdings have an average moat rating of "minimal." That's Morningstar's second-lowest average moat-rating designation for funds (after "none"). Because of the fund's high-turnover approach, it probably won't hold these particular stocks for very long, but their characteristics are typical of the managers' picks. It's worth noting that, although firms with low moat ratings can be more volatile in nature, this fund actually doesn't bounce around as much as its typical mid-growth peer. Its broad diversification and short holding periods limit its exposure to the varying fortunes of any particular company.
Fidelity Mid-Cap Stock
This fund's presence on the list isn't a surprise to us. Longtime skipper Rich Fentin seeks out companies that look cheap relative to their historical valuations and their peers, as well as their cash flows and earnings. He's often owned a sizable stake in industrial firms, though he has more recently owned a clutch of tech firms, which are often quite sensitive to the fortunes of the economy, too. And the fund's forays into banks several years ago, many of which possess only modest competitive advantages, if any, proved disastrous when the financials sector blew up in 2008. (The fund managed a sizable rebound in 2009, but its long-term record is still tarnished.) Its top holdings at the end of last year included few companies with no moat at all (tech-equipment distributor Avnet
Greg Carlson is a mutual fund analyst with Morningstar.
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