Investors Have Flocked to These So-So Funds
Despite their shortcomings, these Neutral-rated funds have seen net inflows in recent years.
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Investors, like teenagers, can be tough to figure out sometimes. Ask a teen why he dresses a certain way, and he might tell you he is simply following the latest styles, just as an investor might tell you he bought a hot new investment because, well, everyone else seems to be doing it.
As investors, we may sometimes wonder why other investors are buying funds with spotty credentials when there are so many better options available.
One way to measure trends in investor sentiment is by tracking asset flows into and out of funds and fund categories. Last week we looked at stock funds that have experienced strong net outflows since the financial crisis kicked into high gear five years ago, but that also remain good choices even if many investors have turned their backs on them. We pointed out examples of funds with Morningstar Analyst Ratings of Bronze or better and explained why they've earned those ratings.
This week we turn things around and look at stock funds that have added assets during the past five years despite their lackluster profiles. All the funds are currently rated Neutral by Morningstar's fund analyst team, meaning they are not expected to outperform their category peer group on a risk-adjusted basis (for more on how Morningstar assigns medalist ratings to funds, watch this video).
It should be noted that the list of analyst-rated stock funds with net inflows since 2008 is somewhat limited, in part because flows into traditional equity mutual funds have also been limited. Out of more than 1,800 rated funds in our database, only about one third have seen net inflows during that time, and fewer than one in 10 have added at least $1 billion in assets during that time. The vast majority of these are rated Bronze or better, but a handful are rated Neutral. A Neutral Analyst Rating doesn't, in itself, mean a fund is bad, but it usually means a better option exists within its category. Let's take a look at the Neutral-rated funds that added the most in net assets during the past five years and find out what's behind the inflows.
Federated Strategic Value Dividend (SVAAX)
Given the popularity of income-oriented stock funds in recent years (as investors have sought out alternatives to the low interest rates available from bonds), it comes as no great surprise to find one on our list, or topping it. Managers Walter Bean and Daniel Peris search for stocks with lower but growing dividends and pair them with higher and steadier dividend payers, says Morningstar fund analyst Kathryn Spica. Sector concentration is not unusual here, which means the fund can miss out when sectors it doesn't own drive returns, such as when financials surged in 2012 (the fund's 6.9% return that year landed it in the 97th percentile for the large-value category). Also, the fund earns a Neutral People Pillar rating because of its managers' low personal investment in the fund.
Janus Triton (JANIX)
Although this fund has been a rare bright spot in the Janus lineup, generating strong returns and attracting new investor assets, significant changes behind the scenes make it less attractive than it once was. The managers who delivered strong returns here in the past, Chad Meade and Brian Schaub, left to join another firm in May. In their place is Jonathan Coleman, who recently stepped down from his previous role as Janus' co-chief investment officer and manager of Janus Fund . Coleman delivered strong results during his tenure on Janus Enterprise (JAENX) from 2002 to 2007, but Janus Fund, his most recent charge, trailed 70% of its large-growth peers during his tenure at that offering. Moreover, Morningstar fund analyst Greg Carlson is concerned about the significant personnel turnover at the firm, noting that Meade and Schaub's departure marks the fourth major manager exodus in the past decade.
T. Rowe Price International Growth & Income (TRIGX)
A number of T. Rowe Price Group (TROW) funds rank among Morningstar's fund analysts' elite, garnering Bronze, Silver, and Gold ratings. And indeed, this fund earns a Positive Parent score because of the firm's track record of retaining personnel and its investor-friendly culture. But Morningstar fund analyst Karin Anderson notes that the fund hasn't distinguished itself in the crowded foreign large-cap space during current manager Jonathan Matthews' three-year tenure. Although the fund has beaten its peers during that stretch, it hasn't significantly outpaced the benchmark MSCI EAFE Index. That may be because, as Anderson notes, the fund's country and sector weightings haven't strayed significantly from the benchmark's.
Data as of Oct. 29.