There's Less Than Meets the Eye for These Funds
Four funds whose Morningstar Analyst Ratings are worse than their star ratings.
Morningstar's recently launched, forward-looking Morningstar Analyst Ratings generally correlate with their respective backward-looking Morningstar Ratings for funds (commonly known as the star rating), though there are exceptions.
Especially for investors used to screening based on stars, a seemingly conflicting Analyst Rating should serve as a warning to dig deeper into reasons the future may not be as rosy as the past.
Within the Morningstar FundInvestor 500, there are currently two 5-star funds rated as Neutral by Morningstar analysts, seven 4-star Neutral funds, and no Negative-rated funds.
The four funds below illustrate some of the pitfalls of screening on stars alone. (The other 5-star Neutral fund was Meridian Growth (MERDX), and the other 4-star Neutral funds were Fidelity Blue Chip Growth (FBGRX), Janus Twenty (JAVLX), Royce Value Plus (RYVPX), and T. Rowe Price New Asia (PRASX).)
T. Rowe Price Growth Stock (PRGFX)
A late 2007 manager change on this fund illustrates one of the classic instances when screening on star performance may fall short of telling the whole story.
Portfolio manager Robert Bartolo has been managing this fund since only then, so the majority of its 4-star rating was achieved under the previous manager, Robert Smith, who managed the fund from 1997 to 2007. Bartolo had a hard time out of the gates in 2007 and 2008 (years that also coincided with some of the most difficult market environments of the past decade). He's done better in the ensuing recovery, but we'd need a longer record that demonstrates his stock-picking skill before recommending this fund.
Permanent Portfolio (PRPFX)
With five-, 10-, and 15-year returns that beat the vast majority of its conservative-allocation peers, investors may find the Neutral rating on this fund to be rather surprising. A look at the fund's underlying components, though, reveal some of our concerns. First, with a combined allocation of almost 70% to gold, silver, Swiss franc assets, and U.S. Treasuries, this fund resembles very few (if any) of the other funds in its group. That idiosyncratic allocation alone should cause investors to question whether, in this case, the fund's performance versus peers (and resultant star rating) fairly reflects its potential. In a market where short-term interest rates are near 0% and the Fed continues to support a particularly loose monetary policy, this fund has enjoyed huge tailwinds from its Treasury and precious-metals stakes in particular.
Those tailwinds have also masked some lackluster active management. Portfolio manager Michael Cuggino's other charges, such as large-growth Permanent Portfolio Aggressive Growth (PAGRX) and short-term bond Permanent Portfolio Versatile Bond (PRVBX), are proxies for some of this fund's underlying components, and those have fallen short of their respective peers. The firm's sparse research resources--Cuggino and a single analyst covering six diverse asset classes--also don't help the fund's case.
Fidelity Balanced (FBALX)
This fund's manager and strategy change in late 2008 provide another illustration of where our Analyst Rating may diverge from the long-term track record.
Most of this fund's 4-star rating was achieved under former manager Larry Rakers, who managed the fund from 2002 through late 2008. Fidelity replaced Rakers and his highly eclectic approach with a more index-hugging, multimanager approach. To be sure, the nine sector-specialist equity managers plus their fixed-income counterparts here have delivered very respectable results since 2009. But that record is relatively short and the multimanager team's middling record on its longest-tenured charge, Fidelity VIP Contrafund, doesn't inspire very much confidence.
Vanguard Morgan Growth (VMRGX)
A smattering of smaller-cap stocks has given this fund a boost over the long term, resulting in a fine record versus other large-growth peers. However, compared with the Russell 3000 Growth Index, a benchmark with more smaller-cap holdings that better tracks this fund's holdings, the fund and its five subadvisors haven't measured up. From 2006 through the end of March 2012, the fund's annualized 4.7% gain trails the index's 5.7%. Having among the lowest fees within the group helps, but the fund also spreads its bets among more than 300 holdings and has a five-year R-squared versus the index of about 98. As such, since 2006, the fund has yet to beat the index or its passive alternative in any three- or five-year rolling period.
Janet Yang Rohr, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.