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Inside Morningstar's 401(k)

The 23 funds that made the cut to get into our 401(k).

Russel Kinnel, 09/19/2011

Let's take a look at the funds in Morningstar's 401(k). I'm one of the people on the committee that selects the lineup, and I can tell you that we try hard to keep it in peak form. The funds are chosen for strong fundamentals such as cost, management, stewardship, and strategy. We want funds that work together, so it isn't simply a matter of choosing our 20 favorite funds in the world. In addition, we do build in some overlap, so we don't intend for employees to own one of everything.

We want great funds for the long haul, and, as you'll see, we don't play favorites with one fund company or sales channel. We do have a fair amount of institutional share classes of funds because those are the cheapest, but the investor share classes of these funds are also good choices.

Let's begin with our latest change, and then I'll walk you through the rest of our U.S.-stock funds, our international-stock funds, and our bond funds.

We replaced Allianz NFJ Small Cap Value PSVIX with Royce Special Equity RSEIX. We like the Allianz fund, but NFJ wanted to reduce its asset base for this fund, so it decided to stop taking new money from midsize 401(k) providers, including Morningstar's. That meant it had to go, as it isn't practical to have a fund in the 401(k) if it won't take new investments.

We chose Royce Special Equity over other worthy small-value and small-blend funds because it is a well-run value strategy with a seasoned manager. Charlie Dreifus focuses on companies with clean accounting, healthy balance sheets, and shares trading at modest valuations. It's a strategy that has historically held up well in bear markets. We like the added level of diversification it provides. Royce Special Equity lost less in 2008's market crash than any of the other candidates we looked at, and it doesn't track our other funds as closely as other candidates do.

We also like the fact that, in the past, Royce has closed the fund to new investors when assets were at a modest level.


U.S. Stocks
American Funds Washington Mutual RWMFX
This fund lagged from 2003 through 2005, but it's come out of it just fine. A focus on dividend-paying stocks trading at modest prices has kept this fund on the right path, as its long-term record shows. With $51 billion under management, the fund is enormous, but it's actually smaller than it has been in a decade, as that dull stretch spurred redemptions.

Some investors have concluded that a disappointing 2008 performance at some American Funds was caused by the firm's asset bloat; I don't think that's the case. Asset bloat was a problem at American, but it was a minor handicap rather than a major problem given its multimanager format and low turnover.

Russel Kinnel is Morningstar's director of mutual fund research. He can be reached at russel_kinnel@morningstar.com.

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