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By Christine Benz and Russel Kinnel | 05-13-2013 04:00 PM

These Fund Apples Fall Far From the Family Tree

Not every fund with a strong Parent grade earns a high rating in our Fund Analyst Rating system--and vice versa.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

Not every fund with a strong Parent grade garners a high rating in our Fund Analyst Rating system. Joining me to discuss some of these parent-child discrepancies is Russ Kinnel; he is director of fund research for Morningstar.

Russ, thank you so much for being here.

Russel Kinnel: Good to be here.

Benz: Russ, we've been doing these analyst-driven ratings for more than a year now--about a year and a half now. They are designed to be forward-looking ratings of a fund's future prospects.

When you look across some of the ratings … you [may] see funds that actually have high Parent ratings, so we like the fund company, but the fund doesn't garner as high a rating overall. Let's look at some examples of where that occurs, and let's start with a Vanguard fund.

Kinnel: Vanguard Morgan Growth is a fund that really just is kind of a bland fund. The really good actively managed funds from Vanguard have the low costs that you see in their index funds, not quite as low, but they have portfolios that are very different from the indexes.

Vanguard Morgan Growth has five sub-advisors, however, and so it ends up with a portfolio that's not too different from an S&P 500 fund or a large-growth index fund. So you have a very diffuse portfolio, and therefore it tends to have fairly bland results.

Benz: So it has quite low costs on its side, though. So, even despite that fact, we think that investors might look elsewhere for that sort of large-cap growth exposure?

Kinnel: That's right. It has low cost, it has a good parent obviously in Vanguard, and parents are a huge part of our process, but it's not the only thing.

In this case, it's just a fairly bland fund that we rate Neutral, not because we think it's going to blow people up, but just because we think the upside is fairly limited.

Benz: Another fund that hits the list of strong parent, don't like the fund quite as much, is American Funds Bond Fund of America. It's not a Negative rating, but it is a Neutral. Let's talk about why the conflict there.

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