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Kinnel: Four Funds for the Long Term

Morningstar's director of fund research Russ Kinnel makes the case for a group of his longtime favorite mutual fund holdings.

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Jason Stipp: I'm Jason Stipp for Morningstar.

Morningstar's fund star ratings can tell you about a fund's performance in the past. Our Fund Analyst Ratings can give you a sense of how a fund might perform in the future. And then there are funds that Morningstar analysts have held for a long time and have been rewarded for doing so. Here with four of his longtime favorite fund holdings is Russ Kinnel, our director of fund research.

Thanks for joining me, Russ.

Russel Kinnel: Good to be here.

Stipp: Morningstar analysts take a long-term view when they're analyzing mutual funds. It sounds like you also practice what you preach in holding funds for the long term as well. You have four of your favorite longtime holdings to share with us today.

The first one is Vanguard Capital Opportunity. This is a Gold-rated large-growth fund, and it recently reopened. Why have you liked this fund over time, and why might an investor who hasn't been able to get into this fund want to consider it now?

Kinnel: It's a great opportunity to get into one of the best growth funds out there. It's got low costs, and it's run by the PRIMECAP team out of Pasadena, Calif. They're a very experienced team that I think does a better job of growth investing than most growth investors out there. And you can look at the track record on this one. You can look at it on Vanguard PRIMECAP, which they've run for even longer, and you can see just how consistently they've done--not that they don't have ups and downs, but whenever you have a really good manager and low costs, usually good things happen.

Stipp: And you also get some smaller caps in this fund as well, right?

Kinnel: That's right. It really started out as kind of a small-mid fund. Now it's mostly large cap, but it's got some small and mid-caps. I actually bought this fund back in '98 when they put the PRIMECAP team on the fund.

Stipp: Your second fund is an interesting one, given some of its troubles in recent times. Save for 2009, this fund, Selected American, has had a string of some below-average years, 2007 through 2012, but it's still a Gold-rated fund. The analyst on that fund, Dan Culloton, says that it's "bruised but not beaten." What have you thought about this fund's recent performance and why do you still like it?


Kinnel: It's become a little tougher to own. It was really easy to own in the '90s and for much of this decade, but in '08, it was holding AIG and it held a number of other financials, and obviously it did poorly then, and as you say, for the most part, the last five years have been kind of lousy.

But they are good investors. I think with AIG, it was a little disappointing in that they clearly were advocating for change, but I think clearly underestimated the degree of problems and lack of risk controls going on at AIG. So that's disappointing.

The performance of some of their other financials is disappointing, but their long-term record is still good. The managers who are [still] there produced that [record], and so I still have faith, but I'll admit that the last few years have not been great.

Stipp: You still have faith that this strategy will work, and they haven't changed their strategy, so what is it that you like about the way they invest, even if it hasn't worked out for them recently?

Kinnel: I think they're very good value investors, somewhat in the Buffett mode in that they look for moats and good management, and they keep costs low. They're very shareholder friendly. So I like all of that, and I like the stability [of management] there. They have a very large sum of friends and family money at stake, so they feel investors' pain. There are a lot of good things. Even though the results haven't been that good recently, the long-term record is still intact.

Stipp: Another one that's probably been easier to own is Gold-rated Oakmark Select. They follow an absolute-value strategy. Bill Nygren is a very famous manager. This fund is also concentrated, so with an absolute-value strategy, it can be volatile at times. How do you set your expectations for this fund, and how do you ride through the rough patches, because obviously it's paid off really well for investors over time?

Kinnel: I think the way to come at a focused fund is you have to set expectations. You have to think, OK, this is a fund that's going to have a bad year, maybe a couple of bad years, just because any time you have a portfolio of maybe 20 names or 25 names, it's going to have some ups and downs, and that's really been the case with this fund.

It has had a long great run, but then we go back to '08, Washington Mutual, people loathed this fund all of a sudden. First Bill Nygren was a genius, then he was an idiot, and now maybe he is a genius again in people's eyes,

But I think if you really look at it, you'll see, this is a good stock-picker who was smart about Washington Mutual at first, but then clearly let it get too big, and it hurt the fund for a while. But even at the worst point in '08, he still had a very good track record against the S&P over the length of his time there. So you could see Washington Mutual was bad, but for every Washington Mutual, he has clearly had a number of successes. So, you have to really weigh that and not fixate too much on one stock.

Stipp: I saw even in 2008 the fund was above the 50th percentile. In the last few years, it's been in the top 1- and 2-percentile range. So it's had very good, very strong recent performance.

One thing about this fund, though, Russ, what do you think about the expenses? Are they a little bit on the high side?

Kinnel: They are, and if you say, what's hard about owning this fund, I would say the fees are a little on the high side. They even had a court case about it where, it gave you some questions about whether they couldn't have done a better job on fees. The fees are respectable, they're not terrible, but I would like them to be lower. They're not as good as, say, Selected American.

Stipp: Your last long-term holding, Russ, is one that you share with a lot of investors, PIMCO Total Return. I believe, at one point anyway, it was the biggest mutual fund in the world, probably among the biggest, or certainly among the biggest now.

This fund has a very good long-term track record, but Bill Gross has had a couple of stumbles in recent times. And the fund is so big now, do you think that there are issues with how he's able to invest, the kinds of choices he can make, just because he's managing so much money?

Kinnel: Yes, the asset size definitely limits what he can do. So obviously picking individual issues or some smaller pockets of the market, you can't do that with a $200 billion fund; it's too big. But there are still a lot of ways you can add value. And historically, he's always been a very aggressive investor who has had some moments where he gets it wrong. So you have to set expectations, again, with this fund; it's going to have some off years.

But I think it's still got a lot of strengths. It didn't just become big a couple of years ago when it had its first bad year. It's been massive for a very long time. It's long had big derivatives positions and other kind of arcane things that are a little scary, but at the same time they've done a very good job with it. They came through '08 with shining colors, which is a time when a lot of derivatives blew up on people. So I still have a lot of confidence in them. Yes, asset size is a bit of a handicap, but it's not a huge one. I think at a bond fund, it's a different story than at an equity fund.

Stipp: Just in general right now, given some of the headwinds in fixed income, do you think it's a good idea for investors to at least strongly consider a well-proven active manager like Bill Gross.

Kinnel: I think so. I think it's a challenging time for investing in bonds, and the long-term track record suggests he is very good. There are some limits to the fund, but I think it's still a very good core holding, even as rates start to rise.

Stipp: Thanks, Russ, for these ideas. Very good long-term holdings, also sounds like good holdings for the long-term to come. Thanks for joining us.

Kinnel: You're welcome.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.

Russ Kinnel owns shares in the following funds mentioned: VHCOX SLADX OAKLX PTTRX

Jason Stipp does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.