Expenses, manager changes, and lagging performance disqualify funds from an elite group.
A version of this article was published in the June 2015 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
In yesterday's Fund Spy, my colleague Russel Kinnel discussed his annual search for the mutual fund industry's strongest offerings. The strict quantitative test highlighted 50 of the best funds, which he then dubs "Fantastic."
The list of Fantastic funds is fairly stable from year to year, but about a dozen funds included in 2014's roster didn't make the cut in 2015. Among those that exited, two were dinged for their expense ratios, two missed the mark following manager changes, and four funds were cut after long-term performance fell off.
Are these deteriorations significant enough to warrant replacing the fund in one's portfolio? In all but one case, the funds still earn Morningstar Analyst Ratings of Gold, Silver, or Bronze, signaling our conviction that they will outperform going forward. One fund was downgraded to Bronze from Silver, and another fell one notch to Neutral, suggesting the funds have significantly steeper climbs.
Less Competitive on Price
Two funds previously deemed Fantastic were dropped because their expense ratios went up. While a basis point or two may disqualify a fund from the Fantastic list, the fees on these funds are by no means alarming.
American Funds Capital Income Builder CAIBX
This world-allocation fund's expense ratio has moved around slightly in recent years, from as low as 0.55% heading into the financial crisis to a high of 0.66% in 2009. The fund had been treading in the middle of that range in recent years, and in 2014, the fund's levy ticked up 1 basis point to 0.62%.
Even with that 1-basis-point move, the fund is still a relatively good deal. It retains its Analyst Rating of Silver--including a Positive Price Pillar rating. It is the largest offering in the world-allocation Morningstar Category by a long shot, and its experienced management team recently split the fund's assets between two internal, yet independent, investment teams to better steer the fund's equity stake. The fund's performance has been strong, thanks in part to a higher equity stake relative to peers.
Fidelity Capital Appreciation FDCAX
This fund also missed the Fantastic list because of a higher expense ratio, but the change in cost is related to the fund's strong past performance. Fidelity is one of a few large asset managers that has performance fees on many of its funds, where the expense ratio ticks up after a period of outperfomance or goes down if the fund has trailed its benchmark.