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Longtime Favorite Funds That Still Look Appealing

Tue, 11 Sep 2012

FundInvestor editor Russ Kinnel says these solid funds have stood the test of time.

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Video Transcript

Jason Stipp: I'm Jason Stipp for Morningstar. 

Morningstar FundInvestor will be celebrating its 20th birthday this month, and we're checking in today with longtime FundInvestor editor Russ Kinnel to learn about some of his favorite funds from past that still look appealing today.

Russ will also be a panelist on an upcoming webinar to celebrate FundInvestor's 20 years; that's going to be on Sept. 19th on Morningstar.com.

Russ, thanks for joining me.

Russ Kinnel: Good to be here.

Stipp: So, we are long-term investors here at Morningstar, and there are some funds that we've liked for a long time. We're going to talk about three of those today. Let's start here at home and talk about domestic equity--a longtime favorite of yours.

Kinnel: If you go back to 2004, when I first started editing FundInvestor, one of the first funds I mentioned was Dodge & Cox Stock, a really good stable firm, stable portfolio, very dependable, and we still like them today.

They had some bumps in the '08 financial meltdown, but still a really good firm. I own the International version of the fund, but we like everything they do still.

Stipp: So you say it's a stable firm. So obviously this is not a fund that's gained its success by shifting around a lot, but more sticking to its knitting. What is the knitting? What is it that they found success with over time, even if they have some rough patches? What's worked for them in the long-term?

Kinnel: Well, I think, it's just fundamental value investing. They look for well-run companies that are cheap. Typically they are large caps. They might move if there are two companies and one has gotten a little pricier, a little more in favor, they'll go to the other. And then when those roles switch, they'll go to the cheaper one, and that works.

The other way they are stable is just the management side. People make a career there. So, the people who were running it in '04, it's almost identical. They've had a couple of retirements, but it's almost the exact same group. And so, when you think about a fund you can own and put away for a long time, Dodge & Cox Stock is a classic example.

Stipp: So, consistency really the key there.

Another group of funds is managed by PRIMECAP; Vanguard has some versions of their funds. What is it that you like about PRIMECAP, and what's really given them the staying power that they have?

Kinnel: Well, some of the same characteristics as Dodge. You've got stable managers and analysts, also deep fundamental work. But really, they go a little further than most growth managers; they are not so focused on momentum. They care about price, and they just have executed over the long haul very well.

If you look at their funds, you wouldn't know that growth had a bad decade. They've really been strong performers. They tend to do really well in rallies, but lose less in down markets.

They run some mid-cap funds, some large-cap, some with Vanguard, some under the PRIMECAP Odyssey name, but they're all really good.

Stipp: So, a growth manager, you would expect that they might have higher volatility, but it sounds like they've given investors a smoother ride. What's the secret to their success there?

Kinnel: I think more attention to valuation. I think some of the growth managers who really go way up and down will let valuation get ahead of them, and they'll pay up for companies, and that's fine. But then you had a down draft, and all of a sudden they really get killed. Companies with high valuations also have big expectations to live up to. A little bit of disappointment, and they get whacked.

Stipp: On the fixed-income side, Russ, an active manager running a fund that you've liked for a long time. They've made some bold bets in the past. What is that fund and what's made them be successful?

Kinnel: Loomis Sayles Bond is a fund that we've liked for a long time. We named Dan Fuss manager of the year back in the '90s, and he and Kathleen Gaffney have just been done a really good job.

There are on the more aggressive side. So they'll go just about anywhere. They'll go into emerging-market debt, they go into high-yield bonds, whatever is attractive. But they do it with a sense of the risk side, so that tones the risk down a little bit. But they are just really savvy investors who have consistently done a good job.

Stipp: And with active management--these are active managers in all these funds--they can have a great long-term performance, but every now and then, as you mentioned with Dodge & Cox, they'll hit a rough patch. As an analyst looking at a fund that's in the middle of a rough patch, how do you know whether the fund is really still a keeper? What do you look at in expectations of that longer-term outperformance?

Kinnel: Well, for one thing I want to see, are all the fundamentals still there? Have key people left? Have they changed the strategy? If I see signs like that, then I'm going to give up on them.

But I also look at performance, except not short-term performance. I want to see, since the manager took over, is he or she still doing better than the benchmark? Are they way ahead? So, for instance, Loomis Sayles or Dodge & Cox, even at their worst point, they're still way ahead of their benchmarks. When that starts to turn, then I worry.

Stipp: What sounds like some great long-term investing ideas, Russ. Thanks for joining me today and happy birthday to FundInvestor.

Kinnel: Thanks.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

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