Weak relative performance has spurred outflows.
The stock market has risen sharply during the past five years. That trend gradually caused the torrent of outflows from equity funds--spurred by the brutal October 2007-March 2009 bear market--to ease and eventually turn into net inflows. However, some stock funds still suffer from hefty redemptions. Let's take a closer look at three equity funds that have lost a great deal of assets both on an absolute basis and as a percentage of assets thus far in 2014 after posting poor performance. Are they still worthy holdings?
Thornburg International Value TGVAX
2014 outflows: $6.9 billion
Investors poured money into this fund during a hot streak; it beat its typical peer in every calendar year from 2000 to 2010, a period encompassing a wide variety of market environments. But the fund has since gone into a major funk, trailing more than 60% of peers in 2011, 2012, and 2013, as well as more than 90% of rivals in 2014 through July 14. For the trailing five years through that date, the fund lags nearly 90% of its peers. (It resided in the foreign large-blend Morningstar Category until moving to foreign large-growth in 2011.) Redemptions have accordingly snowballed: A net $900 million went out the door in 2012, followed by $3.6 billion in 2013 and nearly $7 billion in the first half of 2014. (The latter figure represented one quarter of the fund's assets at the start of this year.)
The fund's struggles owe to a mixture of stock-selection errors and stylistic headwinds. Because of managers Bill Fries and Lei Wang's view of valuations, along with a then-growing asset base, the fund has focused heavily on mega-caps in recent years; meanwhile, smaller-cap fare has largely outperformed. A taste for emerging markets also hurt in 2011 and 2012. Missteps in financials have dented returns in 2014.
These issues have caused the fund's Morningstar Analyst Rating to be downgraded to Bronze. But as the medal indicates, we're still confident in its prospects. The fund's 10-year record is still above average and its 15-year return tops nearly all peers, and the fund's current managers were behind much of that performance. Fries has served as the lead manager or as a comanager since the fund's 1998 inception, and Wang has worked on the fund as an analyst and manager for more than a decade.
GMO Quality GQETX
2014 outflows: $2.6 billion
This isn't your typical large-blend fund. It focuses heavily on companies with high returns on capital, steady profits, and strong balance sheets. Thus, 78% of its assets at the end of February 2014 were stashed in companies that earned wide moat ratings (a measure of long-term competitive advantages) from Morningstar's equity analysts. The fund's typical peer had a 55% stake in such firms, which comprised 46% of the S&P 500.
The fund's approach has often been out of step with the stock market since the October 2007-March 2009 bear market, as economically sensitive fare has typically led the way. The fund missed out on the rally in financials, which it has largely avoided because of their heavy debt loads. The fund trailed more than 80% of its category peers in 2009, 2010, 2012, and 2013, and it sports a similar category ranking for the trailing five years. Redemptions have been the result: A combined $3.5 billion went out the door in 2012 and 2013, and investors pulled out another $2.6 billion in the first half of 2014. (Some of these outflows may be due to shifts in GMO's allocation portfolios.) The fund had $13.5 billion in assets at the start of 2014.
The strategy here may look out of touch lately, but it has generated strong risk-adjusted results over the long haul. During the decade ended June 30, for example, the fund has outpaced 77% of its peers as well as the S&P 500. And while managers Tom Hancock and David Cowan have only been on board since 2009 and 2012, respectively, Hancock is a 19-year GMO veteran and the co-head of its value equity team. This fund's Analyst Rating has dropped to a Bronze as well.
Perkins Mid Cap Value JMCVX
2014 outflows: $2.4 billion
This fund, too, wasn't built to thrive in a bull market. While this is a value fund, it historically has favored cheaply valued companies that also boast strong free cash flows and modest debt. And until recently, the fund also held a double-digit stake in cash. That approach is a big reason why the fund trailed more than two thirds of its mid-value peers in 2009, 2010, 2012, and 2013. But the magnitude of the fund's underperformance is disappointing. Stock-selection mistakes, particularly within consumer discretionary and energy, have weighed on results. And the fund's previously ballooning asset base may have hurt, too.