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By Russel Kinnel | 12-18-2014 09:00 AM

Kinnel's High-Conviction Fund Picks

Dodge & Cox International and a handful of Primecap-managed funds offer low costs, stable management, as well as a clear and consistent strategy, says Morningstar's director of fund research.

Christine Benz: Hi, I'm Christine Benz for How do fund experts invest their own money? Joining me to share some ideas from his personal portfolio is Russ Kinnel--he's director of manager research for Morningstar. Russ, thank you so much for being here.

Russ Kinnel: Good to be here.

Benz: So, it's great to hear you talk about this topic. I know that you are an avid mutual fund investor. You pay a lot of attention to the mutual fund universe. So, when people think about your portfolio, they think about--I would imagine--some carefully selected ideas. So, let's talk about some unifying themes. When you think about active funds in your portfolio, what are some characteristics that your holdings share?

Kinnel: Obviously, low costs, strong management, consistent clear strategy, and competitive advantages in that combination of people and strategy.

Benz: You also said that another thing you look for is stability. And it's interesting when you look at some of your highest-conviction picks, some of the management companies are owned by the fund managers. Let's talk about why that can help promote managerial stability on the funds.

Kinnel: If a manager has ownership of the firm, one, they have a say in how the firm is run, but two, it also means they have an incentive to stick around. Typically, the setup might be that they buy the shares in early on in their career; and then to get maximum value, they've got to stick around. So, essentially, a meaningful part of their compensation comes in the form of that ownership, and to maximize that position you need to stay to retirement or something close to that. In addition, many of these firms have a mechanism set up that says that when you do leave the firm, or even retire, you have to sell your shares back.

So, that means the next generation of investors at the firm can buy in. And also, it means when the first layer of management retires, instead of selling out to another firm--which may lead to an exodus--they've got to sell back to the same employees. So, it's a tremendous mechanism for stability; and if you look at many of the most stable firms, it's no accident that that's the setup they've got.

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