For These Funds, The Future May Not Be as Bright as the Past

"Past performance is no guarantee of future results."

That boilerplate language is ubiquitous in investment advertisements, but it shouldn't be buried in fine print. In fact, I'd say that it's some of the most important investing wisdom around. Too bad investors routinely ignore it. They look at lists of investments that have performed well in the recent past as a shopping list, buying hot funds after they've enjoyed big runups.

Yet hot-performing funds don't always merit investors' attention. It could be that the fund manager is taking large risks to achieve those outsized gains, or perhaps something has fundamentally changed about the fund. For example, it could be its management team has been shuffled around or the fund is experiencing a huge influx of new assets that could prompt a change in its strategy.

With their new, forward-looking Morningstar Analyst Ratings, Morningstar's fund analysts help shine the light on funds whose futures won't necessarily be as bright as their pasts. I used our  Premium Fund Screener to identify such offerings with three- or five-year returns that land in the top quartile of the funds' peer groups and that have also received a rating of Neutral or Negative.

Twelve funds made it through my screen, three of which I've profiled below. And this list is likely to grow in the future: To date, the analyst team has emphasized some of their favorite funds when assigning ratings, so an outsized percentage of the first batch received Silver and Gold ratings. But as more funds receive ratings, a bigger percentage is likely to earn ratings of Neutral or Negative. Premium users can click  here to run the screen themselves.

 AllianceBernstein Large Cap Growth (APGAX)
With near-term performance in or near its category's top decile, this fund easily cleared our screen's performance hurdles. Yet analyst Katie Rushkewicz Reichart is skeptical on a few fronts and has assigned the fund a Negative Analyst Rating. She points to its above-average volatility and boom-and-bust performance pattern, which can spook investors into selling at inopportune times. And even though management has taken steps to address the volatility, Rushkewicz Reichart notes that the fund's frequent manager changes don't inspire confidence.

 Buffalo Micro Cap (BUFOX)
This fund earns an Analyst Rating of Neutral--a notch higher than the AllianceBernstein fund's rating--in part because of management's sensible approach to navigating the universe of tiny companies. As is the case at all Buffalo funds, management seeks financially sound companies that enjoy secular tailwinds and looks to own them when their prices are reasonable. The fund also easily cleared our three-year performance hurdle, in part because of its 48% gain in 2009. Yet longer-term performance has been only so-so. Analyst Rob Wherry also has reservations about the reshuffling of manager duties at advisor Kornitzer Capital Management, and expenses are high relative to those of other no-load small-growth funds.  

 Putnam Voyager 
This fund had very strong showings in 2009 and 2010 under new manager Nick Thakore, and it also has reasonable expenses relative to other funds' within its large-growth peer group. (Costs are one of the five pillars of Morningstar's Analyst Rating system.) Nonetheless, our analysts still give it a Neutral rating. Thakore maintains a greater emphasis on small- and mid-cap stocks than does his typical peer: Although that emphasis was a help in the small-cap-led rally of 2009 and 2010, it has helped jack up the portfolio's volatility level and contributed to a 19% loss for the year to date. And even though Thakore is a seasoned manager, having worked at Fidelity and RiverSource before joining Putnam, his track record during his longest stint, at RiverSource Growth, was only so-so.