Christine Benz: Hi, I'm Christine Benz for Morningstar.com. The year 2015 has been a volatile one for the markets, but some funds have delivered despite that headwind. Joining me to discuss some of 2015's pleasant surprises is Russ Kinnel--he is director of fund research for Morningstar.
Russ, thank you so much for being here.
Russ Kinnel: Good to be here.
Benz: Russ, let's just do a little bit of stage-setting. We were sailing along pretty smoothly until we hit the third quarter of 2015, and then things got pretty volatile.
Kinnel: That's right. And when you have a down time like this, it kind of highlights the funds that are good at playing defense. I think playing good defense--losing less in a down market--is one of the most valuable things a fund can do because that keeps us in the investment so that you're there for the rebound. These are funds that don't just add value on the rallies, they're also about adding value by playing good defense. I think it's worth noting that returns presently are not spectacular, really, anywhere. We're not talking about double-digit returns; we're talking about small single-digit returns or even just losing less than your peers. But it's still important.
Benz: And you probably don't want to make too much of any one time period. But you did feel like, year to date, it's kind of instructive to look at some funds that have managed to deliver despite a choppy market environment.
Benz: You brought a short list of funds that we like that have had particularly distinguished performance so far in 2015. Let's start with Diamond Hill Small-Mid Cap (DHMAX). This is a shop that we have been enthusing about at Morningstar for a while, but people might not be familiar with the firm. Let's talk about that and then talk specifically about this fund.
Kinnel: It's a value-driven firm out of Ohio. They just have a few strategies, but they do them well. There's a heavy emphasis on stock-picking and value; it's a pretty straightforward strategy, but they just execute better than a lot of the other firms we see in that same area.
Benz: This is the small- and mid-cap fund. Let's talk about how it has managed to distinguish itself. I saw that it has roughly a 6% return through close to the end of October, which is certainly good relative to its peer group.
Kinnel: They've cut energy and some of the other areas that have been hit hardest. They have got some individual names that are winners like Boston Scientific (BSX). So, both on a sector and individual-stock basis, they have done a really nice job. This is a tough year for mid-value funds, so I am particularly impressed.Read Full Transcript
Benz: Let's move on to another fund that you highlighted. This is one that whenever we talk about it on Morningstar.com, our users get very excited because they love this fund. T. Rowe Price Capital Appreciation (PRWCX) is having another great year in a string of many good years.
Kinnel: Yes, David Giroux is the manager. It's understandable that people get excited because this is another fund that is great at defense and offense. It just seems to consistently outperform. Giroux has had some nice healthcare stocks and--a little like Diamond Hill--they've also not had much in energy or materials. So, it's yet another good year from this very consistent fund. It's understandable why it would win so many fans; Giroux has just done a great job.
Benz: That one is rated Gold, and it's closed to new investors. The Diamond Hill fund is also rated Gold, but it's open to new investors.
Kinnel: That's right.
Benz: Fidelity Overseas (FOSFX) is another fund that you would highlight. I was looking at it recently; our analyst, Katie Rushkewicz Reichart, likes the fund quite a bit. It's rated Bronze currently, but we think that the manager is an up-and-comer, right?
Kinnel: Yes, he's an up-and-comer and something of an unusual manager for Fidelity. Vincent Montemaggiore is a Warren Buffett fan. He runs a concentrated value portfolio, which is really unusual. Obviously, Fidelity is very much the shop of Danoff and Peter Lynch.
Benz: Growth managers.
Kinnel: Yes, growth managers. But Montemaggiore is a value manager and a focused one. Fidelity funds also generally have very diffuse portfolio. So, he's a really noteworthy manager--someone who hasn't yet gotten on any one's radar. So, I think that adds to the potential for the fund because it's still relatively small--in Fidelity terms, anyway. He's having another good year. Sanofi (SNY) and UBS (UBS) are some of the names [the fund holds]; a wide variety of good stock picks are working very nicely this year.
Benz: One distinguishing feature among foreign funds is the weighting in emerging markets. Where does this fund land?
Kinnel: It's a little light, and that has also helped, for sure. The funds that like emerging markets are really paying the price this year. So, that's another point: If you can avoid emerging markets and natural resources, you are probably ahead of the game this year.
Benz: Let's move on to another foreign fund that you would highlight. You're saying it's having a much-needed good year; that's Thornburg International Value (TGVAX).
Kinnel: That's right. We've got it rated Bronze. It had a really nasty slump up until last year. Now it's starting to come back. Kind of interestingly, its big winners are telecom plays from Japan and Italy. You might not have guessed those would be good places to be, but it's worked out really nicely for the fund. We still rate it Bronze, so we still think it's a pretty good fund; but we have to acknowledge that it had a pretty rough go of it prior to last year.
Benz: The last fund that you highlighted is one that I know the Morningstar team has liked for a long time: Harbor Capital Appreciation (HACAX). It's kind of a straight-ahead large-cap growth fund, which I'm sure has been a good place to be in a market that's been good to large growth.
Kinnel: That's right. To a degree, some of the other funds we mentioned were playing defense. But if you're in large growth, this is kind of year for offense. Sig Segalas-and-team from Jennison, which subadvises the fund, are very much large-growth investors and had a lot of the winners that everyone knows about in the large-growth space: Amazon (AMZN), Facebook (FB), Nike (NKE)--those kinds of names. This is a fund that's very consistent in looking for those growth names and tends to be a consistent outperformer. It doesn't often have years like this where it really dramatically outperforms, but it's just a consistent fund. And obviously, if you have a large-growth fund, you want it to make a little money when large growth is outperforming.
Benz: Russ, thank you so much for being here to share your insights. It's a short time period, but it does illuminate good performance at funds that we already like. Thank you so much for being here.
Kinnel: You are welcome.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.