Funds from Vanguard, Fidelity, and Third Avenue go under the microscope.
At one end of the spectrum we have experience, consistency, low fees and adequate rewards for appropriate risks. At the other end are management instability, muddled strategies, and poor risk/reward profiles.
We're seeing all types of funds as we apply Morningstar's new Analyst Rating to the mutual fund universe. The rating reflects our analysts' qualitative assessments of funds' chances of outperforming on an absolute and risk-adjusted basis over the long term. There are five levels--Gold, Silver, Bronze, Neutral, and Negative--and they're based on fundamental research into fund management, strategy, fees, parent companies, and performance.
We've rated nearly 500 since rolling out the rating last fall and hope to rate at least 1,500 by the end of this year. As the first of many progress reports we'll do throughout the year, here's a sample the fund ratings we've published so far in 2012.
American Funds New Economy ANEFX
This is one of the more interesting funds in the American Funds stable. It has broad authority to invest in stocks of all sizes from all over the globe that are innovating or benefiting from innovation. That sounds like a gimmick from the late 1990s Internet stock boom, but this fund has been around investing according to similar criteria since 1983. Exposure to small-cap and international stocks weighed on its returns in 2011, but the fund still has strong attributes. Those include seasoned managers, a proven low-turnover, valuation-conscious growth style; attractive fees, strong long-term record, and relatively small asset base for this fund family.
Vanguard Wellington VWELX
We rated this fund last year but recently reaffirmed its Gold status following an update interview with its stock manager, Ed Bousa. While acknowledging the extraordinary market environment, Bousa and fixed-income manager John Keogh are still trying to look ordinary. As many investors clamor for more alternative strategies and asset classes that promise both the return of their capital and a return on their capital, this fund has achieved both over the long term with a simple approach. It puts about 65% of its assets in reasonably priced dividend-paying stocks and 35% in high-quality corporate bonds, rebalances, and repeats as necessary. It's harder than it seems to be this straightforward and disciplined, so this fund's consistent execution over the long term is an enduring competitive advantage.
Third Avenue International Value TAVIX
This fund shuns the crowd and sometimes pays for it with lagging returns. But, overall, veteran manager Amit Wadhwaney has delivered decent absolute returns with below-average volatility during his tenure. Like other Third Avenue funds, this one traffics in stocks that meet the family's definition of safe and cheap. That means buying and holding the shares of companies with solid finances, accurate books, transparent disclosure, and stock prices that offer a fair margin of safety. Wadhwaney and recently promoted comanager Matthew Fine will let cash build and won't ape any index or peer group, which can make the fund look out of sync with other foreign small/mid cap funds. But the fund has lost less than most peers and its benchmark in downdrafts like 2008 and 2011. That affords some piece of mind, but at a price: Its fees are high.
Invesco Diversified Dividend LCEAX
There have been many changes to Invesco's equity management teams in the wake of the firm's acquisition of Van Kampen Funds. So far, though, the family has kept its best managers. There's good reason manager Meggan Walsh is still here. During the past 10 years, Walsh has carved out a niche for herself investing in high-quality, dividend-paying stocks. Yield has become a buzzword for income-seeking investors recently, but Walsh doesn't chase it. She's willing to bypass high-yielding fare, like some large banks, if she thinks they're too risky. The fund has posted decent returns on her watch and charges a reasonable fee.
Columbia International Value NIVLX
This fund can be an acquired taste. A low-turnover, contrarian, deep-value team of investors from Brandes Investment Partners runs it. They're not afraid to load up in sectors and countries where they see opportunity. The fund, for example, recently had big stakes in Japanese and communication services stocks. The approach is prone to droughts and can require patience but has paid off over the long term. Its nearly 1.5% fee, however, gives it no cost advantage.
MFS International Growth MGRAX
There have been some manager changes at this fund in recent years, but they have brought some high-quality talent on board. Last year Kevin Dwan became comanager to David Antonelli, who has been on the job here only since early 2010. Antonelli is no neophyte, as his 15-year record at MFS International New Discovery MIDAX attests. Antonelli and Dwan may have a short track record together at this fund, but they'll apply the same quality growth strategy that has worked at well at International New Discovery.
Fidelity Value FDVLX
This experiment needs more time to prove itself. Almost two years ago, the family turned this into a hybrid of a solo fund and multimanager fund, and the jury is still out. Lead manager Matthew Friedman runs half the fund himself while six sector specialists divvy up the rest. Friedman and the other managers have wide-ranging styles, but limited and mixed public track records elsewhere. So far their sleeves have combined to form a portfolio that makes no big sector bets and, on average, has had weaker quality measures, such as debt/equity and return-on-assets. Consequently, it has shown both more upside in rallies and more downside in corrections and has lagged its peers overall since the change.
Third Avenue Focused Credit TFCIX
Besides its safe and cheap mantra, Third Avenue is known for dabbling in the debt of companies emerging from bankruptcy in its equity funds. So, it was intriguing when the deep-value shop launched this fund in 2009 to invest in high-yield bonds, distressed debt, bank loans, and busted convertibles. The fund is still interesting, but it lost its founding manager, Jeff Gary, who had run a distressed-debt fund before, in 2010. Though current manager Tom La Pointe is still supported by Third Avenue's seasoned credit analysts, he still has to build a track record here.
Columbia Large Cap Core NSEPX
There are a lot of red flags over this one. There's been a lot of shuffling on this fund's management team since 2004 and the current management configuration has been in place only since March 2008. Since then the fund has lagged its peers and benchmark. Furthermore, its strategy has shifted. It's now trying to run a more concentrated portfolio of 60 stocks when it hasn't proved it can succeed with a more diversified one with 120 holdings. Fees aren't low, either, and turnover is high.
Putnam Diversified Income PDINX
Since it crashed in 2008, this fund has cut back on risk, shedding some interest-rate sensitivity, reducing leverage and relying less on nonagency and exotic mortgage-backed securities. But it still has significant stakes in these sectors, including inverse-IOs, inverse floaters, and principal-only tranches. Such positions can generate impressive yield and total return at times, but last year they showed their downside again. The fund trailed the category by almost 7 percentage points and lost 3.6%. The fund has struggled too often with its complex strategies to recommend.