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By Shannon Zimmerman | 02-19-2014 02:00 PM

Morningstar Minute: An Equity Fund With Market Protection

This fund has only modestly outperformed its large-cap growth peers, but it can be a solid core holding for investors comfortable with concentrated portfolios.

The Morningstar Minute is our quick take on investments, the market, economic indicators, and more. Join us every day for fresh insights from our analyst team.

Shannon Zimmerman: Bronze-rated John Hancock U.S. Global Leaders Growth is the fund that we are going to discuss today. It's an interesting fund, and one way of thinking about it is to think of it through the prism of 2008 and 2009--dramatically different market years. In 2008, quality funds typically led the way; in 2009, more speculative funds typically led the way. This fund is one of a small number that actually did well, in relative terms, in both years.

The managers have a laudable view of risk, in my view. They don’t consider risk to be a synonym for volatility. They are really trying to preserve capital and prevent loss. And so the quality bias plays out in their preference for companies like Google, eBay, or Monsanto, market dominators with good growth prospects but have wide sustainable advantages relative to the competition, wide economic moats. That buoyed returns in 2008. In 2009, what paid off for the fund was that it was concentrated. And so, the market going up, the fund being concentrated, and just the manager's best ideas all amplified returns. So it was able to do well in both those years.

Some of the drawbacks are the fact that it is too expensive and that the managers aren't sufficiently invested. Large-cap growth is a very competitive category. There are lots of cheaper, solid options for investors to compare this fund with, and the managers of those funds in many cases are more significantly invested than the managers of this fund are.

The other thing I would point out, and this is not necessarily a drawback because the fund has outperformed over the long haul, but it has been a modest outperformer. So this is not a category killer, but in some ways that's consistent with the fund's modest risk profile. The focus on quality names has over time generated modest outperformance but again not a category killer.

For investors who are comfortable with this degree of concentration, 30 to 35 names--actually if you look at the academic literature, the fund is pretty well-diversified in terms of the benefits that you can get by adding names--but relative to industry peers 30 to 35 names is not a lot. So you have to be an investor who is comfortable with that degree of concentration. But if you are, it can certainly be a core holding.

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