Patience is rewarded for sticking with these former laggards.
The most commonly asked questions about our Analyst Ratings inevitably involve instances when ratings appear to be out of sync with trailing three-year returns. We tend to take a longer-term view, and experience tells us that three-year performance can flip very quickly. But that doesn't mean we're oblivious to returns. Rather, we're more focused on returns in the time period since the manager took over and on how the fund performed in various market environments.
To illustrate our approach, I dusted off the July 2007 issue of FundInvestor and pulled four of the Analyst Picks with the worst relative performance in trailing three-year returns and a manager tenure of at least three years. I then looked at the ensuing five-year returns and our current rating. Of the four, all outperformed during the ensuing five years. Two are rated Gold, one Silver, and one Neutral.
Aston Montag & Caldwell Growth
Category three-year rank then: 74
Category five-year rank now: 25
Current Analyst Rating: Gold
This fund has been consistent in approach and management. Ron Canakaris and team built a strong record, but their strategy isn't one that will work over every three-year period. They look for big companies with strong brands trading at a moderate price. When mega-caps and quality go out of favor, this fund lags. However, as those names have some defensive qualities, the fund generally performs relatively well in down markets, so it's not all that hard to hold. In fact, the fund lost less than its peers in 2008 and 2011; that's why it now boasts strong five-year figures.
American Funds Washington Mutual
Category three-year rank then: 71
Category five-year rank now: 22
Current Analyst Rating: Gold
Low costs, management and analyst depth, and consistency make this an easy one for us to stick with even though it, too, goes in and out of favor. Outside of a sluggish 2009, this fund has posted strong relative performance since 2007. We were recommending it when it was out of favor, too, in 1999. As you can see from these two funds, our ratings reflect our view of a fund's long-term prospects, but we're not trying to make short-term calls about when their style will go out of favor.
Vanguard U.S. Value
Category three-year rank then: 81
Category five-year rank now: 42
Current Analyst Rating: Neutral
This fund has undergone the most changes in our ratings and in management and strategy. That's no accident, as our ratings are fundamentally driven. We dropped the fund from our picks list in August 2007 because Vanguard added AXA Rosenberg to run a portion of the fund alongside Grantham, Mayo, Von Oterloo. Our concern wasn't the weak three-year return, but that GMO's impact was being diluted. Our view further dimmed when Vanguard replaced GMO with its own Quantitative Equity Group and boosted the expense ratio, though it was still low. Then in 2010, Vanguard fired AXA Rosenberg because it had messed up its quant models and failed to notify Vanguard in a timely fashion. Today, QEG is the sole manager and Vanguard has lowered fees. QEG is decent, but the fund has to prove itself.
Category three-year rank then: 86
Category five-year rank now: 3
Current Analyst Rating: Silver
This fund still has the same managers and stock-selection method. However, plans to raise the foreign equity weighting over time led us to drop it to Silver. A relatively strong 2008 and 2009 justified our faith in sticking with Eric Ende and Steve Geist. Their records here and at FPA Perennial
The above funds illustrate why we're patient with short-term sluggish performance. All outperformed over the ensuing five years, and three out of four are still highly rated by us. Moreover, the one fund that did fall out of our favor did so because of management and strategy changes rather than performance problems.