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Three Negative-Rated Funds

These funds' fundamentals don't make the grade.

Greg Carlson, 03/20/2012

A version of this article originally appeared in Morningstar FundInvestor.

In November 2011, Morningstar launched its forward-looking Analyst Rating for funds. While our initial focus was on the largest funds (which tend to be good performers with experienced managers) and our favorites, we are increasingly rating funds that have weaker prospects.

Let's take a closer look at three notable funds that receive our analysts’ lowest rating: Negative. Funds with this rating have at least one flaw that is apt to significantly hamper future performance and are considered inferior offerings to their peers.

Oppenheimer Rochester National Muni ORNAX
This municipal-bond fund has long attracted investors with its high-yield payouts, a big reason for its $5.6 billion asset base. The management team has taken a great deal of credit and sector risk to generate that income. And while the managers' credit research hasn't been too bad, their big bets on munis' shakiest sectors--tobacco, airlines, and land-secured special-assessment debt--have made for a rocky ride. They have made the fund even more turbulent by using leverage through inverse floaters: In July 2011, the fund essentially had 123% exposure to the market.

This ultrarisky strategy, relative to its competitors, led to strong returns in the middle of the past decade, but the fund crashed and burned when the bottom fell out in 2007 and 2008. From the end of April 2007 through December 2008, the fund lost 55%, more than doubling the decline of its typical high-yield muni peer. Its long-term record is now destroyed (it lands in the category’s bottom quintile over five, 10, and 15 years), and shareholders have done even worse according to dollar-weighted returns. The fund is just too volatile for a category in which investors prize stability over all else.

American Century Vista TWCVX
Management has long used a mix of quantitative stock-picking models and fundamental company analysis to build the portfolio of this mid-growth fund. It's had periods of fine relative returns, most recently from 2002 through 2007 under former longtime manager Glenn Fogle (who spent 17 years at the helm). But the models have misfired, as they have at many more-pure quant funds. They rely to a great extent on momentum, which has been difficult to find amid the market's twists and turns--and management hasn't been able to overcome that. Indeed, the fund has lagged in both downturns and rallies and trails three fourths of its peers for the trailing five years through March 16, 2012 (and 96% of the category over three years). Furthermore, current managers Bradley Eixmann and Bryan Unterhalter have brief records. Although Eixmann has been a manager here since 2007, he didn't take the lead role until Fogle's late 2009 departure, and Unterhalter was named comanager in 2010.

Templeton Developing Markets TEDMX
Although this fund is led by Mark Mobius, one of the most experienced emerging-markets investors around, it is long past its glory days. Mobius has run this fund since its 1991 inception (and a closed-end emerging-markets fund since 1987) and is backed by a large staff spread across the globe in 15 different offices. Yet despite the team's depth and experience, the fund’s returns over the trailing five and 10 years through January 2012 are just so-so, and its 15-year return is subpar. It has held up a bit better than the typical diversified emerging-markets fund in downturns (owing to its emphasis on larger, more-established firms) but has looked sluggish in rallies. Pushing the fund's Analyst Rating to Negative is its lofty 1.84% expense ratio, which is more expensive than the vast majority of its rivals. The fund has suffered from asset bloat, high fees, and weak stock selection. Although the fund has only two rivals with longer track records, the competition is too stiff in this now-populous category for the fund to make the grade.


Greg Carlson is a fund analyst with Morningstar.

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