A version of this article was originally published in the January 2018 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.
Morningstar issued Analyst Ratings of Negative to seven funds in the fourth quarter of 2017. The Negative ratings signal that investors should avoid these funds at all costs.
Clough China (CHNAX)
This fund underwent a manager change in early 2017, but that's hardly its biggest problem. It suffers from an indexlike approach that makes its high costs especially tough to bear. The A shares charge 1.95% and the I shares cost 1.70%--both well above the median for similarly sold funds. The fund's active share (a measure of portfolio differentiation from the benchmark) was recently just 38%. Its high-turnover approach has led to significant trading costs. Plus, analytical resources are limited, and its parent company ALPS receives a Negative Parent rating.
Deutsche CROCI International (SUIAX)
A questionable and evolving process hurts this fund. The team tries to systematically convert companies' financial statements into real economic P/Es, investing in the 50 stocks with the lowest valuations. But the use of backward-looking data and the potential for large sector and country bets and possible future tweaks to the process erode our confidence. Performance has been driven largely by currency tailwinds versus security selection, and the managers don't invest in the strategy, further denting its appeal.
Ivy Balanced (IBNAX)
An analyst team in flux, coupled with a manager who has limited experience making asset-allocation calls, leads to a Negative rating. Since Matthew Hekman took over in 2014, his calls have hurt results, particularly reducing the fund's equity exposure in 2016. Analytical resources on the fixed-income side are thin. Results thus far under Hekman have disappointed: The fund's trailing three-year return through January 2018 landed in its Morningstar Category's bottom quintile. The fund has Negative ratings for the People, Parent, and Performance Pillars.
Ivy Municipal High Income (IYIAX)
The team guiding this fund isn't as well resourced as its competitors, especially given its credit focus. At times, the fund has held a significant stake in nonrated bonds relative to its high-yield muni category peers, and it has suffered from a few nonpayment events that have hurt results. Beyond concerns about risk management and resources, the fund has above-average fees and a Negative-rated Parent Pillar.
Salient Select Income (KIFAX)
This fund invests in the preferred stock of REITs. It aims for a high yield, but that comes at the price of significant credit, liquidity, and leverage risk. Many issues are thinly traded, and the use of leverage has hurt in the past, particularly during the 2007–09 financial crisis. The fact that the manager has borrowed to meet redemptions is a red flag. Volatile results and high fees are other drawbacks.
Salient Tactical Muni & Credit (FLSRX)
The fund has a spotty history. It previously combined long high-yield muni positions with short positions in corporate credit and Treasury futures. Significant positions in Puerto Rico and tobacco securities and poor hedging dented results in muni sell-offs, leading to outflows. PIMCO took over as subadvisor in 2013, but the lead manager has a short record, and the fund still has some concentrated positions in lower-quality investments. Fees remain a headwind at 1.55%.
SkyBridge Dividend Value (SKYAX)
The fund uses a rules-based approach to build a portfolio based on yield, profitability, and valuation, excluding some sectors such as financials. That avoidance has hurt the fund at times, and the approach has allowed for some holdings with poor fundamentals. A high cost of 1.25% for the A shares is a problem, and manager ownership in the strategy is unimpressive: One manager invests under $100,000, and the other has no investment.
Katie Rushkewicz Reichart, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.