Morningstar Adds New Alternative Categories

Morningstar has added two "alternative investment" categories for mutual funds within the Morningstar category system.

Alternative investment strategies can involve the purchase of assets that aren't stocks, bonds, or cash. They also can significantly employ leverage and bets that securities will decline in value.

Morningstar categorizes funds based on their investment styles, so that investors can make meaningful comparisons among the funds such as ranking them by total returns or volatility.

The new alternative categories for funds follow:

* Managed Futures: These funds typically take long and short positions in futures or other derivative contracts based on market trends or momentum. (A long position is a bet an investment will gain in value, while a short position is a bet that an investment will decline in value.)

* Multialternative: These funds will use a combination of strategies such as taking long and short positions in equity and debt, trading futures, or using convertible arbitrage, among others.

Morningstar added these categories following a proliferation of alternative investment funds that was sparked by a raft of investment in these kinds of strategies.

"More than 400 alternative mutual funds and ETFs launched in the last five years, including more than 100 last year alone. And investors poured almost $38 billion into these funds in 2010," said John Rekenthaler, vice president of research for Morningstar.

The multialternative category has 59 funds as of May 11, 2011. About half of the funds in the category were launched in the last three years. The biggest fund in the category,  Absolute Strategies , has about $3.3 billion in assets and opened in 2005.

The managed futures category has only 15 funds right now and is one of the smallest Morningstar categories in terms of fund offerings. The largest fund in the category is  Rydex/SGI Managed Futures Strategy . That fund launched in 2007 and has about $2.5 billion in assets.

The following is a table of the 10 largest funds with alternative investment strategies.

Largest "Alternative" Funds

  Category Inception Date Fund Size ($B) Total Ret Annlzd 3 Yr Total Ret % Rank Cat 3 Yr Annual Report Net Expense Ratio Hussman Strat Grth  Lg/Sh Eq 7/00 5.6 -2.30 54 1.05 Gateway  Lg/Sh Eq 12/77 5.5 -0.33 39 0.94 Absolute Strategies  Multi-alt 7/05 3.4 2.66 2 1.78 Rydex|SGI Mgd Fut Strt  Mgd Fut 3/07 2.5 -2.26 1 1.97 Diamond Hill Long-Short  Lg/Sh Eq 6/00 2 -3.32 57 1.81 GoldmanSachs AbsRetTrk  Multi-alt 5/08 1.7     1.59 AQR Mgd Fut Strt  Mgd Fut 1/10 1.4     1.25 Vantagepoint Divers Strt  Multi-alt 10/07 0.9 1.90 8 0.91 Natixis ASG Glb Alt  Multi-alt 9/08 0.9     1.6 Forward Tactical Grth  Multi-alt 9/09 9     2.41 Return data through May 11, 2011

 

For more information on the changes, please click here.

Janus Reshuffles
Janus' David Decker is leaving as manager of  Janus Contrarian  and  Janus Long-Short  at the end of June. While lead Janus analyst Kathryn Young said Decker's decision was strictly a personal one, his departure has sparked a raft of management changes. Though these changes seem numerous, she said that they do not reflect any substantial shifts at the firm.

Dan Kozlowski will take over Janus Contrarian after leaving Janus in 2008 to start his own hedge fund. Kozlowski is keeping his hedge fund clients, and Janus will become the general partner of the hedge fund at the end of June. Kozlowski had worked at Janus from 2000-08 as an analyst and as a portfolio manager. Meanwhile, Daniel Riff will take over for Decker on the Long-Short fund and become sole manager after being comanager there. He will relinquish comanager duties at  Janus .

Barney Wilson, will leave  Janus Global Technology  as manager to become comanager of the Janus fund, which continues to be led by Jonathan Coleman. Brad Slingerland will be named to the Global Tech fund. Slingerland started at Janus in 2003. He worked as a tech analyst and spent some time as a comanager on Global Tech.

Vanguard Defends Active Management
Vanguard CIO Gus Sauter recently penned an article explaining why the firm offers actively managed and index funds.

Sauter says the firm offers actively managed funds because he believes the markets are only "reasonably efficient." This belief also informs why he thinks most investors should build the core of their portfolios around index funds.

Vanguard's own results seem to support this contention.  Vanguard 500 Index   ranks in the top third of the large-blend category over the last 15 years through May 11, 2011. Meanwhile, two of Vanguard's actively managed funds in the same category,  Vanguard Growth & Income  and  Vanguard Dividend Growth , trail the Vanguard 500 despite their below-average fees. Vanguard Growth & Income lands in the top 40% of the category, while Vanguard Dividend Growth, which was a utilities fund up until 2002, trails more than 60% of large-blend funds over the last 15 years.

Etc.
Morningstar fund flows for the month of April were recently released. One notable fund that lost a significant amount of investor dollars was Bruce Berkowitz's flagship  Fairholme . It lost an estimated $1 billion of assets in April. This is about 3 times greater than the fund's previous worst month of outflows, which occurred in March 2009. The fund is down about 5% so far this year.

 PIMCO Total Return , the nation's largest mutual fund with $240 billion in assets, continues to dial down its exposure to the U.S. Treasury market. As of April, the fund had increased its net position in government bonds to  negative 4% (that is, net short), while its cash stake stood at around 37% of assets. That combination has pushed the fund's effective duration (a measure of interest rate sensitivity) to 3.4 years from 5.1 years at the beginning of the year. Manager Bill Gross believes that Treasury yields ought to be roughly 0.5% to 1.0% higher, and the moves are designed to protect investors from that risk. Gross has maintained substantial exposure to the overall bond market, though, by balancing the fund's Treasury positioning with a modest stake in mortgage securities as well as meaningful exposures in U.S. credit (both investment grade and high yield), non-U.S. debt and currency (both developed and developing markets), and municipals. In fact, the fund still has an income advantage over its Barclays U.S. Aggregate benchmark.

Mary Schapiro, chairman of the Securities and Exchange Commission, said that the agency will postpone considering proposals that would revise mutual fund distribution fees under Rule 12b-1 until sometime in July.

Michael Manelli, an analyst at Harris Associates L.P., has been promoted to comanager of the  Oakmark International Small Cap . He will join current manager David Herro, chief investment officer of international equities, who has managed International Small Cap since its inception in November 1995.

Manning & Napier is launching an emerging-markets fund consisting of emerging-markets companies or ones that derive at least half their revenue in those countries (excluding most developed nations). Emerging-markets series is expected to charge 1.19% per year.

John Hancock announced Bruce Speca is retiring. He was a named portfolio manager on John Hancock Lifecycle target-date funds and the Lifestyle target-risk funds. The other four named managers are remaining on the funds.

James "Chip" Otness of Goldman Sachs' fundamental equity team is going to retire in December. He's been on the team since 2000 and covers small-cap REITs, materials, and industrials. Otness was at J.P. Morgan for roughly 30 years before joining this team. He is one of the lead managers on  Goldman Sachs Small Cap Value .

Hatteras recently launched Hatteras Long/Short Equity Fund  and Hatteras Long/Short Debt Fund . These funds follow Hatteras' multistrategy and multimanager alternative mutual fund,  Hatteras Alpha Hedged Strategies . Alpha Hedged Strategies launched in 2002 and has $370 million in assets. Alpha Hedged Strategies has lost 1.1% annually over the last five years through May 12, 2011, and ranks in the bottom 25% of the multialternative category. The fund's prospectus expense ratio is 3.85%.

Jeffrey Adams is no longer on the management team of Fidelity Commodity Strategy  or Fidelity Nasdaq Composite Index . The funds are now managed by Bobe Simon, Lou Bottari, Patrick Waddell, Maximilian Kaufman, and Eric Matteson.

Irina Miklavchich joined the management team of   Columbia Emerging Markets Opportunity . The fund is now managed by Miklavchich and existing managers Vanessa Donegan and Rafael Polatinsky.

Gregory Tornga left the management team of Payden Corporate Bond . The fund is now managed by Michael Salvay.

Marcus Franz is no longer on the management team of the Oppenheimer Rochester municipal funds--Oppenheimer Rochester MA Municipal .

James Welch joined the management teams of Dreyfus State Municipal Bond Maryland , Dreyfus State Municipal Bond Minnesota , Dreyfus State Municipal Bond Ohio , and Dreyfus State Municipal Bond Pennsylvania .

Thomas Casey joined the management team of Dreyfus State Municipal Bond Massachusetts .

Mountaga Aw joined the management team of Dreyfus Municipal Bond Opportunity . The fund is now managed by Aw and James Welch.

Christopher Corapi joined the management team of ING Equity Dividend . The fund is now managed by Corapi, Robert Kloss, and David Powers.

Hartford Global Health HLS  will change its name to Hartford Healthcare HLS on Aug. 5, 2011.

Tjeert Keijzer and Tycho van Wijk are no longer on the management team of  ING Global Opportunities . The fund is now managed by Dirk-Jan Verzuu and new managers Huub van der Riet and Alex van der Laan.

Glenn Carlson, Brent Woods, Jim Brown, Amelia Morris, Brent Fredberg, Jeffrey Germain, and Paul Hechmer no longer manage  ING International Value . The fund is now managed by Marin Jansen, David Rabinowitz, and Joseph Vultaggio.

Dawn Guffey joined the management team of Dreyfus Bond Market Index . The fund is now managed by Guffey and Nancy Rogers.

Dreyfus Core Value will merge into  Dreyfus Strategic Value  on Nov. 16, 2011.

David Joy is no longer on the management team of Columbia Portfolio Builder Conservative , Columbia Portfolio Builder Moderate Conservative , Columbia Portfolio Builder Moderate , Columbia Portfolio Builder Moderate Aggressive , Columbia Portfolio Builder Aggressive ,  Columbia Strategic Allocation , and Columbia Portfolio Builder Total Equity . The funds are now managed by Anwiti Bahuguna, Kent Bergene, Colin Moore, Kent Peterson, and Marie Schofield.

David Joy, Colin Moore, and Marie Schofield are no longer on the management of the Columbia Retirement Plus series--Columbia Retirement Plus 2035 . Anwiti Bahuguna, Kent Bergene, Kent Peterson, and new manager Todd White now manage the funds.

David Farhadi is no longer on the management team of Alger Health Sciences . The fund is now managed by Dan Chung and Maria Liotta.

Chris Diaz joined the management team of Janus Global Bond . The fund is now managed by Diaz, Gibson Smith, and Darrell Watters.

Director of Fixed-Income Research Eric Jacobson, Associate Director Kevin McDevitt, senior analyst Karin Anderson and mutual fund analyst Kathryn Young contributed to this report.