Try this screen for core funds that take the road less travelled.
This article first appeared in the February/March 2011 issue of Morningstar Advisor magazine. Get your free subscription today!
Actively managed funds that don't move in lockstep with the overall market may be appropriate portfolio anchors for certain clients, while others may be more comfortable using them to complement core index offerings. These funds tend to be run by managers who don't let benchmarks guide their stock-picking or sector-weighting decisions. You can use this straightforward screen in either Morningstar Advisor Workstation or Morningstar Principia to turn up intriguing large-cap funds which have delivered compelling returns without following an index.
Special Criteria = Distinct Portfolios Only
And ( Morningstar category = Large Value
Or Morningstar category = Large Blend
Or Morningstar category = Large Growth
Or Morningstar category = Mid Value
Or Morningstar category = Mid Blend
Or Morningstar category = Mid Growth )
And Purchase Constraints = Closed-New Investment
And Min Initial Purchase < 25,000
And Analysis not = NA
To set up the screen, narrow the field to domestic large- and mid-cap funds that are open to new investments of $25,000 or less and followed by Morningstar Analysts.
And R2 3 Yr < 85
Next, set the three-year R-squared measure, which represents the percentage of a fund's performance that can be explained by movements in a benchmark index, to 85 or less. (The median R-squared for all U.S. large-cap funds clocked in at 94 for that period.) In the case of all U.S. equity funds, the S&P 500 is used as the standard index, and an R-squared of 100 indicates that the fund's performance moved in tandem with that benchmark.
And % Rank Cat 5 Yr < 33
And ManagerTenure (Longest) > 5
And Audited expense ratio < 1.25
Lastly, narrow the search to funds with top third five-year rankings and manager tenures of at least five years. The median expense ratio for broker-sold large-caps is 1.25% annually, which is the cut-off here.